As the lifetime allowance (LTA) has reduced more people have to decide the options they have concerning any pension fund excess they may have. Below are basic examples of options a client may consider utilising to account for these excesses. We have assumed growth rates for taxed funds are 1% less than gross funds (i.e. pension, ISA and offshore). In all cases we have used an example excess of £100,000 with the client as a higher rate tax payer and with an IHT liability. Obviously these examples are only representative and scenarios will vary for individual clients. It is possible with all these scenarios to “mix and match” options for both the tax charge and investments. These are for illustrative purposes only and should not be seen as constituting giving advice.

1. Age 65. £100,000 excess not crystallised and left within the pension.

2. Age 65. £100,000 excess crystallised today and taken as income from the pension.

3. Age 65. £100,000 excess crystallised today and left in the pension with no income from the pension.

4. Age 65. £100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate. No income taken and invests into collective or onshore bond.

5. Age 65. £100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate. No income taken and invests into offshore bond or ISA.

6. Age 65. £100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate and spends it.

7. Age 65. £100,000 excess crystallised today and taken as a lump sum. Client gifts to trusts or outright to individuals.

LTA excessoptions to consider

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Age 65. £100,000 excess not crystallised and left within the pension.

Value LTA charge value %/£

Residual fund inside estate for IHT

Value retained in pension fund

Income tax to be paid on residual fund

Further pension test at age 75

Death before age 75

Death post age 75 Fund value

£100,000. Nil. No. £100,000. 40%But no income taken.

Yes – on excess fund value. As no income has been taken we can assume growth is 5%.

LTA test on un-crystallised funds and excess.No IHT.Income/lump sum to beneficiaries’ tax free after ex-cess LTA charges.

No further LTA test.No IHT.Income/lump sum taxable at beneficiaries marginal rate.

If die at age 65 the fund of £100,000 will be an excess and taxed at either 55% with the lump sum paid out tax free (£45,000) or 25% with the residual remaining in the pension and paid as income, tax free (£75,000).If reaches age 75 with growth rate of 5% value is £162,889. Taxed at 25% leaves fund value £122,166 for dependants/beneficiaries income.

notes

No fund taken at this point

As the fund is being kept within the pension it does not form part of the estate for IHT.

As no income was taken there will be no tax liability – but note this will be considered at age 75 and also on death after age 75.

This test is on the excess fund value still held within the pension.Any growth will be seen as an additional excess and taxed at 25%.

As the funds have already been crystallised there is no further test and no test on fund growth.

The beneficiary may be a lower rate tax payer. As may also inherit other assets, they may not take this pension income and retain it in the scheme and pass it on their death to their children. If this is the case and they die under age 75 this may be tax free.

These funds are still outside of the estate for IHT. They will be taxed as income on the recipient beneficiary if death after age 75 at their marginal rate of tax.

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Age 65. £100,000 excess crystallised today and taken as income from the pension.

Value LTA charge value %/£

Residual fund inside estate for IHT

Value retained in pension fund

Income tax to be paid on residual fund

Further pension test at age 75

Death before age 75

Death post age 75 Fund value

£100,000. 25%£25,000.

No. £75,000. 40%£30,000.

Yes – on fund value growth. As income has been taken assume both growth and income taken are the same at 5%, so no growth£0.00.

No further LTA test.No IHT.Income/lump sum to beneficiaries tax free.

No further LTA test.No IHT.Income/lump sum taxable at beneficiaries marginal rate.

After taxes totalling £55,000 the fund value at age 75 is £45,000.

notes

This is paid directly to HMRC by pension company.

As the fund is being kept within the pension it does not form part of the estate for IHT.

This is based on the original fund value and does not include fund growth.

This test is on the growth only of the fund still held within the pension.Any growth will be seen as an additional excess and taxed at 25%.Any growth taken out of the fund and spent will not be tested.

As the funds have already been crystallised there is no further test and no test on fund growth.

Although there seems to be a disparity between the beneficiaries’ potential benefits before and after age 75, it should be noted that the beneficiary may be only a basic or lower rate tax payer. As they may have also inherited other assets, they may not take this pension income themselves but retain it in the scheme and pass it on their death to their children. If this is the case and they die under age 75 this may be tax free.

These funds are still outside of the estate for IHT. They will be taxed as income on the recipient beneficiary if death after age 75. Remember, the client has also had income during their lifetime.

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Age 65. £100,000 excess crystallised today and left in the pension with no income from the pension.

Value LTA charge value %/£

Residual fund inside estate for IHT

Value retained in pension fund

Income tax to be paid on residual fund

Further pension test at age 75

Death before age 75

Death post age 75 Comment

£100,000. 25%£25,000.

No. £75,000. 40%But no income taken.

Yes – on fund value growth.

No further LTA test.No IHT.Income/lump sum to beneficiaries tax free.

No further LTA test.No IHT.Income/lump sum taxable at beneficiaries marginal rate.

Client dies at 65 fund value is £75,000. Client dies at 75.

Assuming taxes of £36,791, age 75 value is £110,376.

notes

This is paid directly to HMRC by pension company.

As the fund is being kept within the pension it does not form part of the estate for IHT.

As no income was taken there will be no tax liability - but note this will be considered at age 75 and also on death after age 75.

This test is only on growth of the pension fund held within the pension.Any growth is seen as an excess and taxed at 25%.Assume a growth rate of 5% the value is now 122,167. This represents growth of £47,167 taxed at 25% = £11,791.

As the funds have already been crystallised there is no further test and no test on fund growth.

Although there seems to be a disparity between the beneficiaries’ potential benefits before and after age 75, it should be noted that the beneficiary may be only a basic or lower rate tax payer. As they may have also inherited other assets they may not take this pension income themselves but retain it in the scheme and pass it on their death to their children. If this is the case if they die under age 75 this may be tax free.

These funds are still outside of the estate for IHT. They will be taxed as income on the recipient beneficiary if death after age 75. Remember the client has not had the use of any income.

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Age 65. £100,000 excess crystallised today and taken as a lump sum.client leaves in their estate. no income taken and invests into collective or onshore bond.

Value LTA charge value %/£

Residual fund inside estate for IHT

Value retained in pension fund

Income tax to be paid on residual fund

Further pension test at age 75

Death before age 75

Death post age 75 Comment

£100,000. 55%£55,000.

Yes45%£45,000.

Nil. No income taken. No. Not in pension and fund forms part of the estate at on death.

Not in pension and fund forms part of the estate at on death.

If dies at age 65 the total taxes are £73,000 leaving a residual after tax of £27,000.

If dies at 75 with fund growth total taxes are £81,644 leaving a residual after tax of £39,966.

notes

This is paid directly to HMRC by pension company.

This will now be considered for IHT at the point of death.

As no income taken there will be not be any tax liability. However, investing into collectives or bonds may incur other taxes.

This is no longer part of the pension fund.

Assuming dies at age 65, £45,000 will form part of the estate and be subject to IHT at 40% = £18,000.

Assuming invested in a bond or collective with a growth rate of 4% at age 75 value would be £66,610. Subject to IHT at 40% = £26,644.

This would now be distributed in line with the Will.

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Age 65. £100,000 excess crystallised today and taken as a lump sum.client leaves in their estate. no income taken and invests into offshore bond or isA.

Value LTA charge value %/£

Residual fund inside estate for IHT

Value retained in pension fund

Income tax to be paid on residual fund

Further pension test at age 75

Death before age 75

Death post age 75 Comment

£100,000. 55%£55,000.

Yes45%£45,000.

Nil. No income taken.

No. Not in pension and fund forms part of the estate at on death.

Not in pension and fund forms part of the estate at on death.

If dies at age 65 the total taxes are £73,000 leaving a residual after tax of £27,000.

If dies at 75 with fund growth total taxes are £84,320 leaving a residual after tax of £43,980.

notes

This is paid directly to HMRC by pension company.

This will now be considered for IHT at the point of death.

As no income was taken there will be no tax liability. However, investing into collectives or bonds may incur other taxes.

This is no longer part of the pension fund.

Assuming dies at age 65, £45,000 will form part of the estate and be subject to IHT at 40% = £18,000.

Assuming invested in an offshore bond or an ISA with a growth rate of 5% at age 75 value would be £73,300. Subject to IHT at 40% = £29,320.

Gross roll up will give a better fund value and the inheritable ISA allowance would allow the inherited ISA fund to continue to grow tax free.

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Age 65. £100,000 excess crystallised today and taken as a lump sum. client leaves in their estate and spends it.

Value LTA charge value %/£

Residual fund inside estate for IHT

Value retained in pension fund

Income tax to be paid on residual fund

Further pension test at age 75

Death before age 75 Death post age 75 Comment

£100,000. 55%£55,000.

Yes45%£45,000.

Nil. None as after pension tax charge this fund is not subject to income tax.

No. Not in pension and fund forms part of the estate at on death.

Not in pension and fund forms part of the estate at on death.

If dies at age 65 the total taxes are £55,000. As the client has spent the money there are no further taxes to pay but also no residual fund value.

notes

This is paid directly to HMRC by pension company.

This will now be considered for IHT at the point of death.

The initial 55% tax charge takes into consideration the return of tax that HMRC want and so these residual funds are not seen as income taxable.

This is no longer part of the pension fund.

Assuming dies at age 65, the client has spent the monies (holidays etc.) and so no value to the estate for IHT (possibly some value for purchases like a car etc.) = £0.

Assuming dies at age 75, the client has spent the monies (holidays etc.) and so no value to the estate for IHT (possibly some value for purchases like a car etc.) = £0.

It has been assumed the purchases were of very low value or valueless and that no gifts have been made.

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Age 65. £100,000 excess crystallised today and taken as a lump sum. client gifts to trusts or outright to individuals.

Value LTA charge value %/£

Residual fund inside estate for IHT

Value retained in pension fund

Income tax to be paid on residual fund

Further pension test at age 75

Death before age 75

Death post age 75 Comment

£100,000. 55%£55,000.

Yes45%£45,000.

Nil. None as after pension tax charge this fund is not subject to income tax.

No. Not in pension and fund forms part of the estate at on death.

Not in pension and fund forms part of the estate at on death.

The initial tax charge of £55,000 will apply in both cases. If dies within 7 years* of making a gift the £45,000 investment will be subject to IHT at 40% = £18,000 so total tax charge £73,000.

If dies after 7 years there is no additional tax charge so total tax £55,000. In both cases as gifted there is no residual fund value.

notes

This is paid directly to HMRC by pension company.

This will now be considered for IHT at the point of death but only if within 7 years of making the gift.

The initial 55% tax charge takes into consideration the return of tax that HMRC want and so these residual funds are not seen as income taxable.

This is no longer part of the pension fund.

Assuming dies at age 65 or within 7 years* of death the original value of the gift will form part of their estate for IHT (excluding any fund growth), so £45,000 at 40% = £18,000.

* tapering relief may apply

As age 75 is greater than 7 years from making this gift, it will not be taken into consideration for IHT calculations. Any gift and fund growth will not form part of the estate.

As these funds were gifted immediately it needs to be noted that either the gift crystallised the value for IHT (i.e. fund growth will not be considered) or the gift and fund growth will be outside of the estate after 7 years.

*tapering relief may apply

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