The Pension Lifetime Allowance...
....and what you need to know
Since 2006 the government has restricted tax efficient pension savings by applying a 'lifetime allowance'.
If the total value of all your pensions exceeds the allowance you, or your beneficiaries, could face a tax charge.
What is the lifetime allowance?
The lifetime allowance (LTA) is the maximum total pension pot your can accrue over your lifetime whilst still enjoying full tax benefits. If you breach the allowance it is likely you will be required to pay a tax charge on the excess when you take a lump sum or income from a pension, reach 75 with unused pension or transfer it overseas.
For the current tax year, 2018-19, the lifetime allowance is £1.03m.
If you are or have been a member of a generous workplace pension, or have saved significant amounts in to personal pensions it is worth looking at the total value against the LTA to ensure you don't go over the limit.
As there are numerous types of pension, sometimes is it less than straight forward to calculate the total combined value. There is also differing calculation methods for those pensions already in payment.
When does the LTA kick in?
Neither HMRC, your employer, or your pension providers are checking the value of your pension/s against the LTA on a regular basis. As a result it is the individuals responsibility to be aware of the combined value of their pension funds.
How much tax is there to pay?
If the value of your pensions exceed the LTA you'll incur a tax charge on the amount over the limit. The level of tax is dependent on how this excess if paid out:
If the excess is paid out as a lump sum it is subject to a 55% tax charge.
If it is paid as pension income, the excess is subject to a 25% tax charge, in addition to the standard applicable income tax charge on income.
I may have breached, what can I do?
Since its peak of £1.8m (in the 2011/12 tax year) the LTA has been been periodically reduced, to try and protect those you accrued large pensions prior to the reduction the government has set up various protection schemes.
What are the options?
Fixed Protection 2016
This gives you a LTA of £1.25m, or the current LTA, whichever is higher. This effectively allows you to lock your LTA into the current, higher rate, but also means if the LTA does increase again you will not be disadvantaged.
However, for this to be valid you cannot have made further pension contributions or actively accrued further pension benefits in a final salary pension scheme, on or after 6 April 2016.
Individual Protection 2016
This gives you a LTA equal to the value of your pension on the date the lower allowance was introduced, subject to a maximum of £1.25m. The value of your pension must have been in excess of £1m on 05 April 2016 to qualify . Unlike fixed protection, you are able to continue to make contributions, but a pension in excess of the relevant LTA will be taxed when tested.
Do you need help with LTA?
As qualified independent financial advisers we are here to help. If you would like to gain a better understanding of your current pension planning, and if you are at risk of breaching the LTA, please get in touch.