Lifetime Allowance Explained

Lifetime Allowance Explained

Every UK citizen currently has a pension lifetime allowance, which is the amount you can save into a work or private pension in your lifetime without additional taxes being applied. The current rate in 2018 is £1,030,000 as the lifetime allowance has been indexed to CPI from the 18/19 tax year.

The lifetime allowance (LTA) was first introduced in 2006 and would become an easy tax raid for governments to apply to the pensions of high earners. When first introduced the LTA was set at £1.5 million and then continued to increase each year to £1.8 million in the 10/11 tax year. Since then the allowance seems to be in free-fall and has continually been attacked to try and help the government balance the budget.

Any new increases in the LTA in future are planned at CPI and estimates indicate that the allowance won’t break the previous £1.8 million level until 2036.

Upon retirement, any pension savings that exceed the LTA could be liable to a one-off tax charge of 55% and would considerably reduce the retirement value of a pension a person was expecting to receive. It is therefore essential that pension savers are always aware of the value of the pension or pensions they have and continue to monitor these each year in order to avoid being hit with a heavy tax charge in retirement.

The worrying thing is that 90% of clients we meet don’t know the value of their pension and presume as they are only making smaller regular contributions, their pension won’t be approaching the LTA, however, it isn’t usually the contributions that take pension over the LTA, but the investment growth of the funds themselves.

For instance, somebody 10 years from retirement with a current pension pot of £700,000 could exceed their allowance if their pot grows at 7% a year – even if they stop paying into it now, creating a tax charge on the value exceeding their LTA.

Regular valuations are essential in order to create a pension plan that aims to maximise your LTA, but not exceed it where possible. This is something that Capital Wealth Partners carry out for each of our clients every six months. Early planning can save hundreds of thousands and in some case millions of pounds in tax over the lifetime of a pension.

So what can be done to try and protect your pension from the effects of further reductions in the lifetime allowance?

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