I have said many times that it’s so important to have all your cards on the table for financial planning. Recently, I’ve seen a couple of clients who are making contributions to their pension and do not seem aware that due to the size of their pension pots, they could end up paying a Lifetime Allowance tax charge when they take their benefits.
I’m not necessarily saying that this is an issue, but it is wise to understand the tax charge and plan for it. So what is the Lifetime Allowance tax charge? Currently when you take pension benefits in excess of £1,055,000, and you do not have any form of protection, you have to pay a tax charge of 55% if you take the benefits in the form of a lump sum, or 25% if you take the benefits in the form of an income.
When it was introduced in 2006, the Lifetime Allowance was set at £1.5m, and I know as an adviser I didn’t feel that many clients would be affected. However, having reached its highest level of £1.8m in 2010/11 it was later reduced again to £1m by 2016/17, and it’s slowly increasing again.
Many of you may think that this figure is high but as previously mentioned I have spoken to
individuals who are unaware that they have an issue. When you look at how it is calculated you may understand why. For example, individuals with a defined benefits scheme would multiply their annual pension by 20 and add the lump sum entitlement.
You may think that you could try to avoid this by not taking all the benefits, but any benefits which have not been taken will still be assessed at age 75 and the excess above the Lifetime Allowance will be taxed.
Also, there are other situations where pension benefits are measured against the Lifetime Allowance. So if you want to know more about Lifetime Allowance, the Lifetime Allowance charge, any solutions and whether you could apply for protection please do give us a call.
Disclaimer: Allowances, limits and thresholds correct at the time of writing, but are subject to change in the future. Please confirm the current position before taking any action.