How to beat the pension Lifetime Allowance

The government needs us all to save for our retirement and provides generous tax breaks to encourage pension contributions.

Those tax concessions mean that for many of us our pension is the most rewarding investment we will ever make. But they mean that the more we pay in, the more it costs the Treasury. With the cost of Covid in the billions, the Chancellor has frozen the lifetime allowance, which sets a cap on the amount of money we can save into our pensions.

Chancellor Rishi Sunak has announced that the pensions lifetime allowance is to be frozen at £1.0731m until 2026. Those who breach the threshold face a 55% charge on amounts above this ceiling withdrawn as a lump sum, and 25% if this is taken as income.

A Lifetime Allowance for pension savings of £1,073,100 might sound generous, but the fact is you don’t have to be a high earner to accumulate that level of pension wealth. If you work for 40 or more years, make full use of the tax concessions (which can turn £600 a month into £1000 a month before your money even starts to grow with investment) it can be easy for someone on an average income to reach – and exceed.

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How the Lifetime Allowance can cost you money

If your pension pot has grown past the limit set by the lifetime allowance nothing will happen until you start calling on it. It is only when you start to draw from your scheme that you start facing charges. This will be 55% if you take a lump sum or 25% if you take an income, on top of any tax payable on the income in the usual way.

The bad news is that simply being too diligent in building your pension pot or too lucky with how it is invested could be costly. The good news is that there are some things to do about it.

Will you breach the Lifetime Allowance?

If you think you are getting close to the Lifetime Allowance, the first step is to get a pension valuation from your provider, and if necessary, some help with a projection.

If you will have too much in your pot you could retire early, or simply stop pension savings. But there may be more rewarding ways to beat the limit.

The level of the Lifetime Allowance has changed several times since it was first imposed. The government has recognised that some people will already have passed the limit and have more in their pension pots than they are allowed.  Rather than penalise them for thrift, there are special concessions – Fixed Protection 2016 and Individual Protection 2016. These could give you a lifetime allowance of £1,250,000 if you had already reached that level by 5 April 2016.

The position with these concessions is complicated, and you will need expert help to claim and use them.

But what if you are still building your pension pot?

Other ways to beat the limit

Putting money into your spouse’s pension may help boost your pension as a couple.  You will be able to take advantage of tax relief for a non-earning spouse if you pay in to his or her plan although contributions will be limited by their annual allowance.

Even when if you have both reached the Lifetime Allowance you can still continue to save for your retirement. There are other ways to invest and save outside your pension.

With an Individual Savings Account or ISA you won’t enjoy tax relief on your contributions, but when you take the money out it will be paid tax-free – unlike your pension. This tax year you can invest £20,000 into an ISA, or £40,000 as a couple.

If you want to invest even more, there are other solutions to build your wealth which can be tax efficient, although not completely tax free.

For expert help in making the most of your pensions and investments, call us at Continuum. We can help you build a plan to manage and grow your wealth – and help protect it from the taxman.

Get some help

Anything to do with your pension is important and getting things wrong with your Lifetime Allowance can be expensive.

The simple way to avoid expensive complications is to get expert advice. At Continuum we have the expertise in tax, pensions and investment that you need. Simply call us to get it working for you.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement or investment strategy, you should seek independent financial advice before embarking on any course of action.

When investing your capital is at risk.

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. Pension income could also be affected by interest rates at the time benefits are taken.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

The Financial Conduct Authority does not regulate taxation advice.


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