If your pension pot is becoming a sizeable asset, it might not be long until you could be taxed at a painstaking 55%. The lifetime allowance or ‘LTA’ is essentially a cap on the size of your pension. The current limit is £1,073,100. Go over this and your money could suffer significant tax penalties. This amount includes any contributions you make to your pension, as well as the growth of your fund, and is applied across both defined benefit schemes and more typical defined contribution pensions.
Fortunately, the tax penalties will only apply when you come to take the money out, however, they are pretty steep. This complicates further at age 75 but that’s for another article.
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What are the lifetime allowance tax charges?
If you take any income over the LTA as a lump sum, it will be taxed at an eye-watering 55%. If, instead, you take it as a regular income that could soften the blow slightly as it will be taxed at 25%. Although, that will be on top of your marginal rate so it’s still a minimum of 45% and could even cost you 65% if you’re a higher rate taxpayer. Ouch!
How could this impact me?
I can already hear you thinking “I don’t need to worry about that? A million pounds is a long way off!” Well, maybe it’s time to re-consider…
If you have £700,000 in your pension and it grew at around 5% a year, even if you completely stopped contributing, your pot would be over the million-pound mark in just over seven years – not that long at all. If you were also contributing £1,000 a month, you’ll have in excess of a million pounds in just six years – the lifetime allowance can creep up on you pretty quickly.
How can I prevent myself from being taxed at 55%
It’s important not to be complacent. If you don’t want the LTA to affect you, you have to plan ahead. Ultimately, depending on your objectives, there may come a point when it’s sensible to stop contributing to your pension and make use of some of the other tax wrappers available to you.
I must stress that stopping contributing to your pension certainly does not mean halting investing and saving entirely, which is another mistake people commonly make. It just means shifting your strategy slightly. Other suitable strategies could include taking your tax-free cash earlier than planned to ensure the growth on this doesn’t take you closer to the lifetime allowance, and you could consider how to use anything over the LTA for generational planning.
Generally, the lifetime allowance can become extremely complicated, particularly once you start taking income or if you have multiple schemes of different types. If you have pensions assets nearing £700,000 in value, you really should be working with a financial adviser.
So, if you have a decent pension pot and don’t want to end up being taxed as much as 65% take some advice and plan ahead!
Watch our webinar
The Lifetime allowance – could it affect youIn conversation with Jack Munday and Jordan Gillies
Do you need help with your retirement planning?
Our specialists can help you prepare for retirement and provide ongoing advice once retirement has arrived. Get in touch to discuss how we can help you.
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All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.
Saltus Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.
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