With the Lifetime Allowance frozen at £1,073,100 until 2026, this could bring many people into tax charge territory.
Even with modest investment growth levels, having the ceiling frozen for five years will undoubtedly have an impact. With tax rates of between 25% and 55% for values in excess of £1,073,100, these can be considerable sums of tax.
Therefore, it is vital that you understand the ‘lifetime allowance’ value of your pensions to avoid sleepwalking into a tax trap.
This charge is calculated on all types of pension schemes, both defined benefit and defined contribution schemes, and is potentially charged twice in your lifetime, when you take any benefits or die before the age of 75 and again at the age of 75.
The calculation of the ‘lifetime allowance’ value differs for defined benefit and defined contribution schemes, and with many people having both, the interaction between them offers a number of planning opportunities to minimise the effect of this tax charge.
Whilst £1,073,100 sounds like a lot of money, if someone relies on this to repay their mortgage and then fund 30 or 40 years of retirement, it could put their lifetime goals at risk.
On Friday 12 March, we hosted a 30-minute webinar to discuss these changes in more detail. If you missed it please feel free to watch below.
The good news is that tax relief on pension contributions has not been affected. You can still save up to £40,000 each year into your pensions and benefit from the generous income tax breaks (as well as tax-free growth and Inheritance Tax exemption). So, if you are still building up your retirement savings, using a pension fund is still the top choice for most.
This Budget has been tagged as ‘spend now, tax later’, and so it’s important to make the most of these generous tax reliefs while they’re still around.
Furthermore, with Corporation Tax rates increasing for companies generating profits above £50,000 from 2023 onwards, pension contributions (which reduce a company’s taxable profits) become even more attractive.
What you need to do now
- Understand the current combined value of all of your pension arrangements; if you have defined benefit schemes get them correctly valued for this purpose
- If you have both defined benefit and defined contribution schemes you will need advice to get these valued correctly
- Anyone with pension funds valued in excess of £800,000 may need to consider alternative methods of saving towards their retirement
- Review your existing level of pension contributions – should they be increased/decreased?
- Anyone whose pension values are approaching or already in excess of the Lifetime Allowance should be considering the suitability of crystallising some or all of their pension savings
- Anyone aged 50 and above should get this reviewed as part of their retirement strategy immediately
Get in touch
If you have any further questions about the change and impact on your pension, please get in touch today via the button below.