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I am lucky/unlucky to be over (slightly) on my pension LTA. When do I have to pay the monster tax?

13 April 2021

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Question by Colin

Hello lovely boring team. My question is really simple but cannot seem to find anywhere the answer. I am lucky / unlucky to be over (slightly) on my pension LTA. When do I have to pay the monster tax. Is it when I have spent up to the LTA or is it before.

Answered by Rich Ellis

Hi Colin,

Some of the best questions are short and to the point. Unfortunately, in this case neither the question or answer is simple at all.

On 6th April this year the Pensions Lifetime Allowance (LTA) increased to £1,073,100. This is the maximum amount that can be drawn from a UK pension scheme without triggering a tax charge. In terms of when you pay the tax, well it is a myth to think that you pay the tax once the value of your pensions reach the LTA

There are various ‘events’ called BCE’s which stands for ‘Benefit Crystallisation Event’ which will trigger an LTA assessment. You only pay an LTA tax charge once your benefits exceed the LTA when a BCE occurs. The tax charge itself is 25% on the excess if benefits taken as income or 55% if benefits taken as a cash lump sum.

In the main, these happen each time you access your pension benefits, reach age 75 or die before taking the benefits. In total there are 13 different BCE’s which will all trigger a tax charge on the excess over the LTA. I won’t list them all here but I would fully advocate anyone with pension savings projected to be close to or over the LTA to seek and obtain independent financial advice prior to accessing their pension benefits.

Answered by

Rich Ellis

Director and Co-founder

I am Director and Co-founder at Ellis Davies Financial Planning Ltd, an independent financial planning business we set up in 2017 after working 20 years in Financial Services. We currently advise approx. 100 client families predominantly in Bristol and the South West.