Pension savings in excess of the lifetime allowance are subject to a lifetime allowance charge, which is applied at a rate of either 25 per cent, if the funds are designated to provide an income, or 55 per cent, if they are used to pay a lump sum.
There are some options available to those who want to limit the amount of their pension which could fall subject to the lifetime allowance charge. Members can still apply for Fixed or Individual Protection 2016, but not everyone will meet the strict eligibility criteria.
For those who have already accessed some of their pension, the withdrawal of drawdown funds can reduce the amount of excess in the scheme to be tested at age 75 under BCE5A. However, withdrawals are subject to income tax, and moves the money into the member’s estate if it is not spent, which could lead to an inheritance tax liability.
Gifting assets directly to charity seems like it would be a straightforward solution. It would also be helpful for members who have pension investments which they are unable to sell or transfer, which can limit their ability to transfer their pension or take benefits.
Unfortunately, unless there can be certainty that an investment is worthless, under current pensions legislation there is no scope to do this as an authorised payment. If an asset which is gifted away has any value, it would be treated as an unauthorised payment, with significant tax charges for the member.
Nevertheless, despite the limitations of pensions legislation, there are still a few options available to those who are keen to donate part of their pension to charity.
Lifetime gifting
Payroll giving is not just limited to salary or wages. Members who are receiving a pension income via PAYE may also be able to make use of payroll giving to make donations to charity.
As with payments from salary or wages, the deduction is made before tax. The deduction is then paid to a Payroll Giving Agency which pays the funds to the member’s chosen charity.
The member must be aged 55 or over to access their pension. The amount accessed will be subject to a lifetime allowance test, but this option can be effective if the goal is to reduce a potential lifetime allowance charge liability at age 75.
A further point to consider is that, if income is paid through flexi-access drawdown, the money purchase annual allowance will be triggered. This would limit the member’s future ability to build up their pension savings – although this is unlikely to be a concern for those with lifetime allowance issues.
