“Thinking is one thing no one has ever been able to tax.”
(Charles Kettering 1876 – 1958)
Since 2010 there have been a number of pension reforms that have taken place and with this a steady decline in the Lifetime Allowance, down to its current level of £1.25 million for the 2015/16 tax year. Come April 2016 we will see a further reduction to the Lifetime Allowance when it will decrease from £1.25 million to £1 million.
Given that pensions are typically viewed as a long term commitment, whilst your funds could appear to be well within this threshold now, this may no longer be the case once you reach the point in time when you wish to commence drawing benefits. So in order to avoid the Lifetime Allowance charge which occurs if you breach the limit, do you cease making contributions, take your benefits early or simply decide whether the Lifetime Allowance charge is a price worth paying?
So what happens if I breach the Lifetime Allowance?
Whilst a high number of individuals will never exceed the Lifetime Allowance, for those that are close to, or have already breached the limit it is important to be aware of the tax implications that this will have.There are two main options for those individuals whose pension funds have exceeded the Lifetime Allowance, these are:
- Draw the excess as a lump sum before the age of 75 – this will be less the Lifetime Allowance tax charge of 55%.
- Retain the excess in your pension pot, before or after the age of 75 – less a 25% Lifetime Allowance Charge (additional to any income tax due on the pension).
Can I prevent this from occurring?
Depending on your individual circumstances there may be a number of options available to you to avoid such a charge. A preventative measure which could be taken is to apply for Lifetime Allowance protection. Specific details are yet to be announced at this stage, however this may be similar to previous protections which have been available following reductions in the Lifetime Allowance.
Every individual would like to be able to avoid tax charges wherever possible, especially those that penalise you for having high levels of savings. It should be borne in mind that wherever there are possible solutions, there are likely to be further tax consequences which will need to be considered. It will be a case of looking at the advantages and disadvantages of each to arrive at a suitable outcome.
As ever your Courtiers adviser is available to guide you through your options and help you to arrive at a suitable recommendation that will help you to achieve your personal goals and financial objectives.
Please note that all tax treatment depends on individual circumstances and is subject to change.