• Christopher Pedel


With the Lifetime Allowance (LTA) at just £1m and more clients choosing drawdown, the second LTA test has become a key planning consideration.

When clients first move into drawdown they trigger a Benefit Crystallisation Event (BCE) which tests the benefits being taken against the client's available LTA. There are two separate tests at this point, one for the tax free cash (TFC) and one for the amount moved into drawdown. Both BCEs will use up a certain percentage of the LTA. If the benefits taken together with all other previous benefits , are less than the LTA there is not LTA charge.

Example - Jenny

Jenny takes £200,000 tax free cash and moves £60,000 into drawdown in June 2017. This uses up 80% of the LTA.

Where a client's total benefits exceed the available LTA they are subject to a lifetime allowance charge. The charge is 55% where any excess is taken as a lump sum or 25% on any excess that is retained within the drawdown plan. The drawdown funds will alos be subject to income tax as and when they are taken in the normal way.

Example - Graeme

Graeme has a fund value of £1.2m and no forms of LTA protection. He crystallises all his funds in May 2017. The maximum tax free cash is limited to 25% of the LTA ie £250,000. £750,000 of the funds moving into drawdown are also within the LTA. For the excess of £200,000 he can either receive a lump sum net of 55% tax ie £90,000 or take the 25% charge and move an additional £150,000 into drawdown.

However, for those using drawdown that isn't the end of the LTA, they also need to consider the second LTA test. The second LTA test occurs when clients use their drawdown funds to either buy an annuity or when they reach age 75 - whichever is sooner. It then tests any increase in the fund value between the first BCE and the second.

For the second LTA test the original tax free cash is no longer relevant. The second test is only concerned with the increase in the value of the funds that were moved into drawdown.

Article taken from TECHTALK JUNE 2017

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