How to have too much in your pension


The government wants us to save for our old age. It is why pension contributions have tax advantages which help make a pension one of the most lucrative investments most of us are likely to make.
The more you have in your pension pot the more comfortable your retirement can be. But it is possible to have too much.
The amount the government adds to your pension depends on your income tax bracket. It means that a basic-rate payer only needs to make an £80 contribution to put £100 into their pension. A higher-rate payer earning between £45,000 and £150,000 a year only pays £60 to achieve the same £100 of pension savings. Even those who don’t earn enough to pay income tax can receive tax relief at the basic rate and make up to £3,600 of pension saving a year.
But those tax concessions cost the Chancellor a great deal of money. HMRC estimates the cost of pension contributions would be more than £40bn in the 2017-18 tax year. So the government has imposed limits on what you can save into your pension.

Annual allowance

Generally, you and your employer can contribute up to £40,000 each tax year, or the total amount you earn. This is known as your annual allowance.

To receive tax relief, your personal contributions can’t be higher than your earnings – but if you haven’t used your full allowance from previous years, you might be able to use it in the current tax year. This could mean you might be able to make a contribution of up to £160,000 in some circumstances.

Not many of us will be able to make the maximum contribution every year. But however much we put away, over a period of perhaps 40 years it will mount up, thanks to compound interest, and hopefully the investment skills of your pension provider. This sounds like a very good thing  – but the government has also imposed a Lifetime Allowance on what you can save into your pension.

The lifetime allowance

The lifetime allowance is the total you can have in all your pensions together over your life without incurring a tax charge.  It is currently set at £1,030,000. It is a lot of money, but it can be surprisingly easy to reach, by the time you want to retire..

Your pensions are measured against this allowance whenever you take money from your pension or when you turn 75. If the value of the payouts from your pension pots exceeds the lifetime allowance, there will be tax on the excess – called the lifetime allowance charge.

  • Any amount over your lifetime allowance that you take as a lump sum is taxed at 55%.
  • Any that you take as a regular retirement income – for instance by buying an annuity – attracts a lifetime allowance charge of 25% on top of any tax payable on the income in the usual way.

What can you do if you exceed your lifetime allowance

If you discover you are in danger of exceeding your lifetime allowance. You might need to take your pension early or stop contributing to avoid your pension pot growing any larger. If you already have saved too much in your pension, you might be able to register for protection with HMRC.  If you believe you will do so soon, you may need to change your pension savings plan immediately.

In all cases, professional advice is essential. A call to Continuum could help provide it.

The value of your pensions and investments, and the income they produce, can fall as well as rise and you may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

Book a free initial consultation

Book an initial consultation with one of our independent financial advisers or call us on 0345 643 0770 if you would like to discuss further.

Sources:

telegraph.co.uk – If pensions tax relief is scrapped, how much will I lose? – 25th October 2018

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