The government is keen for us to save for retirement. But it can’t afford to let us to save too much. The generous tax breaks to encourage pension contributions mean that the more we pay in, the more it costs the Treasury.
The lifetime allowance (LTA) is one way that the government caps the amount of money we can save tax-efficiently.
The lifetime allowance for pension savings will increase from £1,030,000 in 2018/19 to £1,055,000 for those retiring in 2019/20. You don’t have to be a high earner. Over a working life of 40 years or more, with some successful investment it can be easy for someone on a middling income to reach – and exceed.
If you are in your 40s, and paying in £1,000 a month, you are almost certainly going to run over the allowance.
We look at what happens when you do, and what you can do about it.
Will the lifetime allowance affect you?
If the lifetime allowance (LTA) is exceeded on the member taking benefits before age 75, the lifetime allowance charge (LAC) is 55% if the excess is taken as a lump sum and 25% if taken as income.
These figures have been set so that the tax paid is broadly the same however you take the money. The question is, what can you do about it?
What to do if you think you’ll breach the LTA
If you think you are getting close to the LTA, get a pension valuation from your provider.
If you’re still a way off retiring, remember that the LTA is likely to rise in line with inflation. This might give a little room for manoeuvre, but you would probably expect the value of your pension to grow by more than the Consumer Prices Index.
You could retire early, or simply stop saving into your pension. But there may be more rewarding solutions.
Can you get a higher lifetime allowance?
The government recognises that the LTA causes problems for people who already have more in their pension pots. This can easily happen as the level of LTA has changed several times since it was introduced.
There are currently two ways to enjoy a larger LTA:
Fixed protection 2016 – If you, or your employer, have made no pension contributions since 5 April 2016, you can apply for Fixed Protection 2016. This will give you a lifetime allowance of £1,250,000.
Individual protection 2016 – If your funds were over £1,000,000 at 5 April 2016, you could apply for individual protection 2016. This gives you a lifetime allowance of the value of your pension rights as at 5 April 2016, subject to a maximum of £1,250,000.
You may need expert help to make the most of these arrangements.
Pay into your spouse’s pension
Topping up your spouse’s pension may also be an option. Putting money away for a non-earning spouse gets you tax relief as you pay into his or her plan.
You can, in theory, help them reach the LTA on their own – although in practice contributions will be limited by their annual allowance.
Other ways to save
Of course, even when you have both reached the LTA, there is no need to stop saving for your retirement. There are other ways to save tax-effectively, and the most obvious is an Individual Savings Account or ISA.
You don’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.
Get some help
Anything to do with your pension is important and getting things wrong with your LTA can be expensive.
The answer is to get expert advice. At Continuum we have the expertise in tax, pensions and investment 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 investment strategy, you should seek independent financial advice before embarking on any course of action.
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.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation advice.
moneyadviceservice.org.uk – Lifetime allowance for pension savings