Hi if my pension exceeds LTA can you draw down before 55?

12 October 2021

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Question by Simone

Hi if my pension exceeds LTA can you draw down before 55? Leaving LTA in. I know you will pay tax. Thanks


Answered by Andrew Neligan

Hi Simone,

Thanks for your question.

Under the current regulations, you can't access your pension until 55. However, that is increasing to 57 from 6th April 2028.

Additionally, the way the Lifetime Allowance rules work is that it is only charged once you have used up your allowance in full.

For example, the current allowance is £1,073,100. If your pension pot is, say £1.5m and you drew down £107,310 in a year you would use up 10% of your LTA and would pay income tax on 75% of it (£80,482.50). Depending upon other income in the tax year you would pay 40% tax on some or all of it (possibly 45% if you received more than £150k income in the tax year.) The remaining 25% (£26,827.50) would be the tax-free lump sum.

Ignoring increases in the LTA for the purposes of the example, you could repeat this for 10 years after which time you would have used up the full LTA (£107,310 x 10). Any future withdrawals would then be liable to the LTA charge and charged at 55% if you took it as a lump sum or 25% (on top of normal income tax) if you took it as income each year.

You could take the whole fund in a single year and use up your LTA in one 'hit' and pay the LTA charge but it would be inadvisable as the tax hit would be 45% on the majority of the pension fund below the LTA and 55% on the excess.

There are a couple of other notable points to make:

  • The lifetime allowance is tested at various points (' Benefit Crystallisation Events') including using the fund purchasing an annuity, taking the tax-free lump sum in full, age 75 and death.

  • You might be able to protect the excess amount using Fixed Protection or Individual Protection.

I hope this helps.

Andrew

Answered by

Andrew Neligan

Chartered & Certified Financial Planner.

Typically, I work with individuals and couples who have got to the point in their lives that they have important questions about money they want answering. They may be thinking about retirement in the next 5 to 10 years but they are worried they won’t have enough so they want to make sensible decisions now. Or, they really want to retire sooner, but either they don’t know if they can afford to, or they are afraid they will make decisions that they may later regret.