No spare LTA left? Don’t risk excess tax at 75

A selection of terracotta pots of different sizes, topside down in a tired looking tray.

For financial professionals only

With inflation leaping ahead, the Lifetime Allowance (LTA) frozen for the foreseeable and even wealthy clients deferring retirement in the face of sequence of return risk, the possibility of getting caught for avoidable tax at 75 in your SIPP – or maybe one of your SIPPs – is growing.

Asset cascades

A very common approach to retirement planning is to divide assets into separate pots of different risk and to spend them one after another. Although the opposite approach has some supporters, generally speaking investors first spend their lower risk pot - to avoid facing any immediate challenges to executing their long held plans from adverse markets.

This approach means that higher risk, higher growth assets may be separately segregated and possibly invested through a different SIPP manager, which could lead to unintentional consequences when the client reaches age 75.

BCE Test 5a

The Inland Revenue don’t really want pensions to be a highly efficient route to avoiding Inheritance Tax. So they look to close loopholes. For this reason among others there is an extra test at 75 of crystallised funds. This charges 25% tax on any growth in the value of a crystallised money purchase pension over its value when crystallised. Where no spare LTA is available to offset this gain, all the gain is assessable. The concept behind the policy is that you receive tax relief on your pension because you are going to be spending it on your income, not planning to use it for wealth transfer.


John had exactly £1,073,100 in three equal, separate SIPPs and took full PCLS, crystallised everything on his 62nd birthday, using up all his LTA.

  • Pension A in cash; and
  • Pension B in a mid risk portfolio; and
  • Pension C held with a high growth equity manager. This pot then doubled in value over the next 13 years.

By his 75th birthday, John had spent all the first SIPP, half the second and none of his equity portfolio. SIPP providers A and B would test his fund against the original designation into drawdown and both would see that there was no tax to pay.

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SIPP Provider C would see a big gain from the original designation and charge tax equivalent to 12.5% of that fund being 25% of John’s investment growth.

This seems unfair but those are the rules. SIPP providers have their hands tied.

A possible solution

Parmenion’s multi pot SIPP as a consolidation vehicle would allow John to hold three different investment styles in one SIPP via sub-pots.

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When his overall SIPP was tested at 75 against BCE Test 5a the overall value would be 83.4% of the original value, made up of nothing remaining of one third – half of one third = 16.7% and twice the starting value of one third – 66.7% - and therefore less than the original designated amounts - meaning no tax to pay.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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