In April, we revealed three ways the Budget could raise your tax bill and in this month’s follow-up, we take a closer look at one of them.
The chancellor’s announcement of a freeze to the Lifetime Allowance (LTA) is set to raise almost £1 billion for the Treasury, helping to rebalance the public purse in the wake of £300 billion of coronavirus borrowing.
Funds are expected to come from charges to pensioners who exceed the frozen allowance and through decreased spending on tax relief as those approaching the limit stop contributing to their pension.
What is the Lifetime Allowance, how much is the charge for exceeding it, and what might it mean for your pension plans? Read your guide for the five things you need to know.
1. The LTA is a cap on the amount you can withdraw from your pension without paying a charge
The LTA currently stands at £1,073,100. You can withdraw this amount from the pension plans you hold – including any workplace pensions but excluding the State Pension – without having to pay an additional LTA charge.
Once you exceed this amount, you become liable to a charge of 55% on any excess you take as a lump sum. The charge is 25% for any excess pension taken as income.
When the LTA was introduced in 2006 it stood at £1,500,000 before peaking at £1,800,000.
It had been set to increase last month in line with the consumer price index (CPI). Instead, it has been frozen until at least 2026.
2. Your pension pot might be protected against the LTA
Since the LTA was introduced, certain protections have been available via HMRC. These are designed to prevent those who accrued pension wealth before the introduction of the LTA – or who were caught out when the LTA dropped – from being disadvantaged.
While the chance to apply for most forms of protection, including primary and enhanced protection, has now expired, you can still apply for other protections online.
You might be able to apply for individual protection 2016 if your pension savings were worth more than £1 million on 5 April 2016. You might also be able to apply for fixed protection 2016 in some cases.
You can use the Government Gateway to find out if you already have protection in place and also be sure to speak to Globe IFA if you think you might be eligible to apply.
3. The freeze could penalise those “seeking to do the right thing for their retirement”
If you don’t have protection in place and are not eligible to apply for it, the freeze to the threshold could make a real difference to your retirement plans.
Before the freeze was officially announced, former pensions minister Steve Webb confirmed that a freeze could lead to more than one million pensioners exceeding the threshold. He went on to say that this penalised good investment performance and those simply trying to do the right thing by saving for their future.
Following the Budget, the Financial Reporter quoted Webb as saying that “although pension wealth of more than £1 million will seem a huge amount to most people, probably more than a million people of working age can expect to breach that threshold based on current policies.”
The current LTA may seem like a comfortable retirement pot, but figures from Aegon suggest that a fund that size would typically buy someone aged 65 an income of around £26,100 a year, increasing in line with inflation. That’s around £1,740 a month after basic-rate tax.
4. Even a relatively modest pot could exceed the threshold at retirement
Canada Life has looked at pension pots to determine how large a current fund would have to be before it could be expected to breach the LTA at retirement.
Their research predicts that a pension pot of £469,000 could breach the LTA within 20 years, even if contributions were stopped now.
A fund of £351,000, with contributions of 10% a year from someone earning £80,000 would also breach the LTA in 20 years. This assumes an LTA frozen until April 2026 and then increasing by an average of 2% annually.
5. Globe IFA can help you put a long-term retirement plan in place aligned with your goals
If you are worried that your pension pot could exceed the LTA, remember that it might not be possible, or even desirable to avoid the charge altogether.
Pensions are tax-efficient and the Income Tax and Capital Gains Tax (CGT) benefits – combined with the effects of compound growth – could mean you are still better off paying the charge.
The important thing is to be aware the LTA exists and to factor it into your plans. Globe IFA have decades of combined experience. We can ensure you build your pension wealth in the most tax-efficient way possible.
We can talk you through all your pension options, letting you know when a benefit crystallisation event (BCE) will occur – effectively a test of your pension pot against the LTA – to ensure you don’t pay a charge unnecessarily.
Get in touch
If you are concerned about the freeze to the LTA and its effect on your long-term retirement plans, speak to us now.
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to find out what we can do to put your mind at ease.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
