Case Study: Drawdown Options and the Lifetime Allowance

The Lifetime Allowance, at £1,030,000 for 2018/19 and increasing by CPI each year, is likely to trap more clients over the coming years.

With the unknown of how future legislation might change the Lifetime Allowance, particularly given what has happened over the last 10 years, planning affected client’s retirements is becoming increasingly difficult.

The main question we pose or see considered when looking at a flexible retirement strategy for clients with Lifetime allowance considerations is:

Is it potentially more efficient to crystallise up to the Lifetime Allowance, diverting future growth to a non-pension wrapper, or to use the flexibility of a series of UFPLS’ over the course of retirement?

We can consider the options for one particular client.


Mr Jones, aged 62, has a pension fund worth £1,136,784 and has no entitlement to Fixed or Individual Protection. In 2018/19, the Lifetime Allowance applicable is £1,030,000. Mr Jones would like to commence an immediate retirement income strategy achieving £35,000 gross per annum.

He would also like to access a lump sum of £115,000 in 2023.

The assumptions used in considering his options are:

  • CPI inflation of 2.50% per annum
  • £35,000 per annum income need increasing by the rate of CPI
  • Investment returns of 5.00% per annum after fees

Crystallising up to the Lifetime Allowance

The first option to consider is immediately crystallising £1,030,000 and re-investing the £257,500 tax-free cash in a GIA/ISA portfolio.

The act of crystallisation results in the following pension split:

Funds crystallised and in drawdown: £772,500

Funds uncrystallised: £106,784

Total: £879,284

Mr Jones will be withdrawing £35,000 per annum from crystallised funds for as long as possible and has no Lifetime Allowance remaining.

He does not need to access the pension for a lump sum as this can be sourced from the investment portfolio. The projection to age 75 would be as follows:

  • Crystallised fund value: £720,478
  • Uncrystallised fund value: £191,769

The crystallised value is lower than the value designated to drawdown in 2018 so it is only the uncrystallised value that attracts a Lifetime Allowance tax charge.

A 25% tax charge would result in Lifetime Allowance excess tax of £47,942

The 55% tax charge is not applicable as the age 75 test is not one in which benefits are being taken.

Using a series of Uncrystallised Fund Pension Lump Sum (UFPLS)

Under this option, £35,000 gross will be withdrawn from the pension each year as a UFPLS. In 2023, £115,000 will be withdrawn as tax-free cash in line with the client’s objectives and the UFPLS each year will continue.

The projected figures at 75:

  • Crystallised fund value: £576,704
  • Uncrystallised fund value: £818,200

The lifetime allowance has not been used in full and based on the £35,000 per annum UFPLS’ and a single tax-free cash withdrawal in 2023, there is 15.56% of the allowance remaining.

  • Lifetime Allowance in 2031: £1,419,866
  • Amount of Lifetime Allowance remaining: £220,898

The Lifetime Allowance tax charge at 75:

Crystallised fund excess Uncrystallised fund excess Lifetime Allowance remaining Excess amount Tax charge at 25%
£56,256* £818,200 £220,898 £653,558 £163,389

*Value of crystallised funds minus amount originally designated to drawdown


Option Tax at age 75 Post 75 Pension value
Use Lifetime allowance £47,942 £864,305
Annual UFPLS £163,389 (£115,447 more in tax) £1,231,515 (£367,218 more in a pension)

While the tax position appears more favourable when using the Lifetime Allowance in full immediately, there are considerations that might outweigh the possible tax advantages:

  • Lifetime Allowance changes: Using the Lifetime Allowance in 2018 leaves no room to benefit from future changes to the limit. Any further reduction in the LTA would likely be accompanied by protection available to affected individuals while there is maximum potential to benefit from an uplift in the allowance.
  • Potential IHT implications: If this money is not spent, gifted or invested in Business Property Relief assets, death in the short-term could result in a higher amount of tax payable.
  • No tax-free cash entitlement remaining: This could impact on planning around a future increase in taxable income available to the client. UFPLS would preserve the TFC, which could be used in isolation strategically in certain years.

In summary, the tax implications can be substantial, but a large part of the decision making will depend on future changes, and as we do not have a crystal ball, this makes it largely guess work. The joys of financial planning!

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