Protect your Pension from a Hefty Lifetime Allowance Hit
The UK’s Lifetime Allowance (LTA) has the potential to hit high-value pension pots hard and anyone exceeding the allowance threshold faces taxes they might never have factored in.
Building up a valuable pension pot is a lifelong goal we aspire to, looking forward to a rewarding retirement either back home or somewhere new. Whatever stage you’re at or wherever you’re based, it’s important to be aware of current and future tax liabilities on your overall pension’s value. Introduced in April 2006, the UK Government’s Lifetime Allowance (LTA) lurks in the background waiting patiently to tax pension pots in excess of £1,073,100 (2020-2021). So, if the total value of your pension pot is set to eclipse the million-plus mark, Hebden Consulting’s specialist financial advisers can help you understand and navigate the implications of the LTA, tax rules and any pension-related queries.
Unravelling LTA in relation to pension benefits
The LTA restricts tax-breaks on the total amount of pension benefits built up in your lifetime, including both personal or company schemes, whether they be money purchase or a defined benefit, such as a final salary pension. If the total value of your pension exceeds the £1,073,100 limit (with the exception of your state pension), the LTA will impose taxes on any of the following:
a lump sum of cash,
income from your pension pot,
transfer to an overseas pension (i.e. a Qualifying Recognised Overseas Pension Scheme), and
if you’re aged over 75 with unused pension benefits.
This harsh LTA tax threshold applies to the size of your pension fund rather than the contributions you or your employer have made. This means that any investment growth will also be taken into account alongside tax-free lump sums. While pensions in general are complex enough, Hebden Consulting’s experienced team will check the entire worth of your pensions against the LTA limit, calculating the value of any of your pension schemes with cashflow modelling tools and up-to-date knowledge of financial rules.
Timescale and tax charges to consider
All pension funds are tested against the LTA at certain stages of your life. Hebden Consulting’s professional planners can determine the value of your pensions, the arrangements you have in place and the stage you’re at. As well as knowing and understanding this timeline, our team are fully aware of the intricacies of any pension schemes you possess and the repercussions in relation to the LTA.
When it comes to applying LTA taxes, these charges can be hard-hitting. If, when tested, the value of your pension exceeds the level, you’ll face a tax on the amount that is over that limit. The taxable amount will depend on how the excess is paid out, such as a 55% tax charge if the excess is paid out as lump sum or a 25% tax charge on pensionable income. Taking any ‘excess’ as income on top of other earnings/pension income, can push you into the next tax bracket. However, if you do exceed the LTA limit, you can continue to pay into a pension, but you will still face tax charges on the excess.
Hebden Consulting can decipher the annual pension you’re due to receive and your total fund value whether you have one or multiple pension holdings. And, if you’re an expat aged 55 years or over (and have cashed in a portion of your pot or are intending to), we’ll figure out what percentage of your total fund value will be taxable. For instance, from 55, you’re free to cash in or access part, or all, of your pension; your lump sum or pension income is tested immediately against the LTA and, at this point, it’s the total value of the pension you access that is assessed, not your total fund value. Meanwhile, from 75, pensions not cashed in or accessed are tested against the LTA, while drawdown pensions are re-tested against their original value. Certain rules are there if you transfer pensions into a ‘Qualifying Recognised Overseas Pension Scheme’ before the age of 75, or if you die before 75.
Not safeguarding your pension, meanwhile, might result in higher tax charges, so we will inspect the terms of your pensions carefully; in some cases, you may not be able to make further pension contributions if you want protection from the higher LTA. Our experts understand the subtle and stark differences between various pension plans as well as the regulatory requirements for transferring your pension, and the steps needed to safeguard benefits. In terms of the LTA, Hebden Consulting can also signpost clients to existing government protection schemes (e.g. the Fixed Protection 2016, Individual Protection 2016 to name a few).
Prioritise pension planning
With so many points to consider, planning a pension with a professional should be a priority. At Hebden Consulting, we work towards a strategy which yields the maximum value for your future wherever you’re based. We recognise how the value of your pension (and other sources of investments) fluctuate over time and will prioritise your specific pension options. Finding the right balance for your fund is important and Hebden Consulting are on-hand to examine and ensure your fund continues to grow. Our team will advise you whether it is sensible to take a pension if you relocate and contribute to it even if you have moved abroad (either temporarily or permanently).
To navigate the LTA and plan the best pension for you and your family, contact Hebden Consulting at info@hebdenconsulting.com or visit our contact page to arrange a complimentary pension review.
The information is provided in good faith without any warranty and is intended for informational purposes only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. For further details see our Regulatory Statement.
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