There has been a lot of talk in the financial pages over the last few weeks over the Lifetime Allowance (LTA), complete with dire warnings for those who might be in danger of exceeding it because of an upsurge in the values of some investments over the last year.

For those not well versed in such matters, the LTA is the maximum that can be saved into a pension over someone’s lifetime before (relatively punitive) tax charges apply. As I’ve remarked in a previous blog, the Government has been meddling with the LTA ever since it was introduced in April 2006. Since then, the allowance has been increased in the years up to 2012, slashed a few times between then and 2016, and increased marginally from 2018 through to 2020.

To add to all this confusion, there have been no less than eight levels of ‘’protection’’ introduced during this time which have attempted to limit the consequences of the Allowance for those individuals whose pension funds exceed (or may exceed) the pre-cut level of the Allowance.

It currently sits at £1,073,100, where it will stay frozen until 2026. And while that might sound like a large sum of money in the scheme of things, it’s worth remembering that (on current projections) a lump of money that size invested now could be offering the retiree an income yield of about £40,000 a year based on totally unguaranteed future returns.

And who knows whether or not the LTA will be further adjusted in the next few years? We may well have a new Chancellor or even a new Government before 2026. Equally, if it is left as it is until 2026 and the Government of the day is feeling magnanimous, then it could be increased sharply to make up for the missed inflation increases over the prior five years. It will be interesting to see how any chatter on this develops over the next few years and in any election manifesto.

12 possible steps…

So if you are close to the Lifetime Allowance, or concerned that with continuing growth you may exceed it in the future, then it may well be prudent to seek professional financial advice and head off any future problems at the pass. At RetireEasy we tend to steer away from telling people what to do with their finances… simply try to help them make informed decisions. And here are a few things to consider:

• While the lifetime allowance is currently frozen at £1,073,100, some people have managed to ‘’protect’’ their specific lifetime allowance at a higher level.  If you are one of those people, make sure you have saved your certificate of protection securely as you will need to prove this if you withdraw any pension funds above the standard lifetime allowance.
• If you do have a protected lifetime allowance make sure you understand the rules about the potential withdrawal of this valuable protection. For example, it is possible to ‘’bust’’ your protection when changing jobs and your new employer automatically enrols you into a workplace pension plan or life assurance scheme.
• In a few circumstances it is still possible to protect the lifetime allowance up to a limit of £1.25 million; you can speak to your pension provider or adviser to see if you are eligible for such protection.
• You may think about reducing or ceasing your pension contributions so that you don’t pay the lifetime allowance charge on your pension fund in excess of the lifetime allowance. However, you must be careful here as this might turn out to be the wrong thing to do.
• Pension plans remain one of the few savings arrangements offering generous tax reliefs and it could be that the tax reliefs that you receive on your contributions may be greater than the potential lifetime allowance tax charge.
• If you are thinking about ceasing/reducing pension contributions in your workplace pension plan, do make sure that you will not lose any other associated benefits such as employer pension contributions, membership of a company life assurance plan and / or other benefits that are tacked onto your workplace pension plan.
• Up to the age of 75, you are in control of when you pay any lifetime allowance charge; and remember… you usually won’t pay the lifetime allowance charge until you withdraw any funds above the allowance. You can manage how and when you withdraw funds from your pension plan and defer when you may need to pay any lifetime allowance charge.
• Be mindful that, when you reach age 75, HMRC require that your pension funds are counted and tested and the amount of your fund in excess of the lifetime allowance will be subject to a lifetime allowance tax charge of 25%.
• On your death, should that be prior to the age of 75, you can pass on your pension to your nominated beneficiaries and there is usually no tax to pay on lump sum pension death benefits paid out up to the lifetime allowance. Pension funds do not normally form part of your estate for inheritance tax purposes and this makes them a very tax-efficient way to pass on your wealth.
• If you are unsure whether to continue saving into your pension plan, consider other forms of savings that can provide tax effective withdrawals when you retire, for example an ISA.
• There is no tax relief on any contributions that you pay into an ISA but any future withdrawals of cash or income from the ISA will be free of income tax and capital gains tax.
• Remember: ISAs do form part of your estate on death so will count towards your total estate for Inheritance Tax purposes.

How can your RetireEasy LifePlan help you?

At a very early stage, RetireEasy took the decision not to overcomplicate the LifePlan experience by adding dozens of additional questions in an attempt to evaluate who had what level of protection and what Lifetime Allowance tax charge may apply.

As a straightforward alternative, where a potential Lifetime Allowance tax charge may apply, a customer can simply allow for this as a “Future Cost”… whether it is a one-off charge at 55% or a regular charge at 25% if the excess pension fund is withdrawn as a pension.

LifePlan can also calculate when a pension fund may exceed a customer’s personal Lifetime Allowance in the future, and it allows customers to set an individual growth rates to be applied to a pension fund plus add future lump sum or regular contributions.

The downloadable summary shows at-a-glance the annual value of the pension fund so any threat of exceeding the LTA can be easily spotted allowing the customer to consider all options and to plan for any potential LTA tax charge.