In the March 2015 budget, the government announced that the pension lifetime allowance (LTA) would reduce from £1.25m to £1m from April 2016. The LTA will be indexed by CPI (Consumer Price Index) from 2018 and for the 2019/20 tax year the allowance stands at £1,055,000.
This is a big change for pensions. The LTA is the maximum amount of pension savings people can make tax-free over their lifetime. At retirement you can normally take 25% of your fund tax free. Anything over this is taxed at your marginal rate of income tax. If your pension savings are above the LTA, any excess will be subject to an additional tax charge of 25% if taken as income or 55% if taken as a lump sum.
Many won’t see this additional tax charge coming. Those that have a defined benefit pension and are now in defined contribution schemes may be particularly vulnerable to the hidden risks of a lifetime allowance charge. Defined benefit pension will be valued at 20 times the gross annual pension but as pensions in deferment are subject to ongoing revaluation, deferred defined benefit members could be unwittingly overfunding their defined contribution pension.
Some protections will be available to allow people to protect their pension LTA against a higher allowance and will normally require certain conditions to be met. Details of the current protections and how to apply can be found in our basic guide.
We can help.
By carrying out a ‘pensions wealth check’ we can help you work out how much pension wealth you have amassed so far, and how probable it is you will breach the LTA at retirement. Only by gathering the evidence, will you be able to identify the likelihood of breaching the LTA and decide whether to carry on paying contributions, apply for protection or take a different course of action.