Why is it important for your pension and tax planning to check if you are putting too much into your lifetime pension?
If you are a high-income earner or wealthy individual, you could be putting too much into your lifetime pension and risk exceeding the pension lifetime allowance. When you are doing your pension and tax planning, it is important to consider the pension lifetime allowance as you could end up paying more tax than you need to.
What is the pension lifetime allowance?
There is a limit to how much you can save into your pension tax-free over your lifetime, known as the pension lifetime allowance (LTA). It’s been controversial because the government has steadily reduced the lifetime allowance limit from £1.8m in 2012. From this April 2020, the limit will be £1,073,100.
Broadly speaking, it means there will be a tax charge on the amount in your pension over the lifetime allowance. The tax paid on this excess amount depends on how it is withdrawn (i.e. as a lump sum or in instalments) and it is charged at either the point you draw benefits in excess of the lifetime allowance, or if you have not taken benefits by age 75, a lifetime allowance test will be carried out at this age.
Check your pension savings and forecasts against the pension lifetime allowance
And although £1,073,100 may sound like a lot of money, we are seeing more and more individuals being caught by the pension lifetime allowance limit. It is worth checking what your pension savings are forecast to reach - and if you need to take action to mitigate your potential tax liability. If so, there may be other, more tax efficient ways for you to continue saving for retirement.
What are your pension and tax planning options if you are close to the pension lifetime allowance?
You may need some professional pension and tax planning advice if you are paying too much into your pension and suspect you may breach the pension lifetime allowance. Independent wealth advisers, like Canaccord Genuity Wealth Management, will consider your individual circumstances and determine a range of pension and tax planning options for your retirement. These might include:
1. Consider applying for protection
There are two types of protection that you can apply for which will fix your pension lifetime allowance at a higher amount:
Fixed protection 2016 – as long as you haven’t made a pension contribution since 6 April 2016, this fixes your lifetime allowance at £1.25m.
Individual protection 2016 – only available if the value of your pension was worth more than £1m on 5 April 2016. This fixes your lifetime allowance at either the value of your pension savings as at 5 April 2016, or £1.25m if the value exceeded this.
2. Draw an income from your pension
This is not straight forward and there are a lot of aspects you will need to consider.
There is also a trade-off between the ‘money purchase annual allowance’ rules and the tax rate you’d pay in income to mitigate a lifetime allowance tax charge. Further, triggering this means you and your employer can only contribute £4,000 a year to a money purchase pension. This area of pension and tax planning is complicated, so we recommend you seek professional pension and tax planning advice from a wealth adviser, such as Canaccord Genuity Wealth Management.
3. If you don’t need the income
There are also options if you don’t need the income. For example, you could gift it or use it to fund a whole of life policy that pays out a lump sum outside your estate on your death, which could be used towards mitigating your inheritance tax liability.
Why is it important to seek professional pension and tax planning advice if you are close to the pension lifetime allowance?
Our expert wealth planners will provide retirement advice that considers if you are saving too much, or if you have too much built up in your lifetime pension, which means there could be a tax charge on the amount in your pension over the lifetime allowance.
In this article, we have deliberately simplified our explanations. The forecast lifetime pension calculations and drawdown options will require significantly more work and explanation to ensure you make best use of the pension allowances available.
You should also consider using cash flow modelling to ensure your pension is accurately forecast, including assumed inflation and investment returns. To learn more about cash flow forecasting for pension planning, please read this article about how cash flow modelling works.
At Canaccord Genuity Wealth Management, we offer retirement advice via our independent wealth planners. To discuss if you need to take action to mitigate your potential pension tax liability, get in touch. As well as the pension lifetime allowance, our retirement advice will also take account of all your circumstances including your health, overall finances and family circumstances, to consider your full range of options.
If this article has interested you and you would like to meet with one of our wealth planners or have any questions, please get in touch for more information on +44 02 7523 4500 or book a free consultation.
This article also featured in Money Observer https://www.moneyobserver.com/how-to-outsmart-lifetime-allowance-stealth-tax
Did you find this interesting? See more on retirement:
- Baroness Ros Altmann explores the future of retirement (video)
- Will I run out of money? How does cash flow modelling work?
- Make the most of your retirement (PDF)
The tax treatments set out in this article are based on our current understanding of UK legislation. It is a broad summary and cannot cover every circumstance and it does not constitute advice. Levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.
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