Posted on: 05 Sep, 16
What could the further reduction mean to your retirement income?
The Government has introduced comprehensive reforms to the pension rules over the previous few years. One important change, which may have been overlooked by some savers, is the reduction of the Lifetime Allowance that applies to pension savings. This further reduction means that you may be affected.
Your private pension contributions are tax-free up to certain limits. This applies to most private pension schemes, for example, workplace pensions, personal and stakeholder pensions, and overseas pension schemes that qualify for UK tax relief. The Lifetime Allowance is a limit on the value of payouts from your pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge.
The Government has indicated that this allowance will increase each year in line with inflation (CPI) but only from 6 April 2018. It was reduced from £1.25m down to £1m from 6 April 2016. If you have more than £1m in your pension pot, or are likely to have at retirement, you can apply to protect it against reductions to the Lifetime Allowance.
Whilst some people may not be affected by the Lifetime Allowance, it’s important to take action if the value of your pension benefits are approaching, or are above, the Lifetime Allowance. As pensions are a long-term commitment, what might appear modest today could exceed the Lifetime Allowance by the time you want to take your benefits.
Exceeding the Lifetime Allowance could have significant tax consequences, for example, any lump sum withdrawals you take from the excess amount within your pension are taxed at 55%, and if you retain the excess amount within your pension fund a 25% tax charge is made (and any income taken from the fund will be taxed at your marginal rate of Income Tax).
If you could be affected by the reduction in the Lifetime Allowance, there are some actions you could take to help protect yourself from this potential tax charge. When the Lifetime Allowance was introduced in 2006 (and in subsequent years when it has been reduced), following pension reforms, those with benefits valued in excess of the Lifetime Allowance (or who expect them to be above in future) have been able to apply for ‘protection’ to protect the value of benefits they have built up (and future benefits that may accrue) from tax charges. If you have accrued pension benefits since 6 April 2016, Fixed Protection will not be available, so you should obtain professional financial advice to look at the options available to you.
If you are already taking benefits from a pension, this will also impact your Lifetime Allowance. It is important to note that the allowance applies to the value of your pension when you eventually come to draw money from it (and not the value on 6 April 2016) or at age 75 (or earlier death), even if the funds haven’t been drawn on up to that point. This means that even if your pensions are currently worth well short of the new £1m limit, you could still be affected by the reduction and may need to take action now – even if you think the reduction does not really affect you currently.
A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.
While £1m may sound like a generous sum, it is surprisingly easy to breach this limit, meaning that you could be subjected to a tax bill of up to 55% on some of your pension pot. Whether you’re a saver in the middle of your working life or nearing retirement, it’s crucial you know if you’re on track to breaching the Lifetime Allowance. If you have any concerns and would like to discuss your situation, please contact us.
|There are three protections you can apply for:|
|Protection||What it does||Can I keep building up my pension(s)?|
|Individual Protection 2016||Protects your Lifetime Yes. Allowance to the lower of: ||Yes. But you must pay tax on money within your pension(s) that exceed your Allowance.|
|Fixed Protection 2016||Fixes your Lifetime No, Allowance at £1.25m.|| |
No, except in limited circumstances. If you do, you’ll:
|Individual Protection 2014||Protects your Lifetime Allowance to the lower of: ||Yes. But you must pay tax on money within your pension(s) that exceed your Allowance.|
If you would like to further understand the implications of the reduction in the Lifetime Allowance and how it could impact on your retirement plans, please contact us to discuss your situation or if you have any further questions.
To find out more, please contact us.
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