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In the first blog in our Pension Series we would like to cover something that has become an important topic of conversation recently: the pension lifetime allowance. Contrary to popular belief, it is not something that only the super wealthy need to worry about. As you go through your working life you accrue funds in your pension pot and it’s a case of ‘out of sight, out of mind’. Until we are close to retirement, that is. However, it’s worth taking a minute to find out what it is and, if you already know, figure out what you can do to protect yourself if you are likely to be affected. For a more personalised assessment, talk to one of our Plutus Wealth independent financial advisers at www.plutuswealth.com.
It is the financial limit to the pension pot or pots (if you have more than one) that you have built up over your working life. It includes all pension schemes – personal and workplace – but does not include your State Pension. It is the amount of money that forms your total pension fund when you:
The amount varies from year to year, typically increasing in line with inflation. For 2019-2020 it is £1,055,000 and it is expected to rise to £1,073,000 for 2020-2021. The limit will apply in the year that one of the milestones above is reached.
Once the pension lifetime allowance is reached, any funds over and above the allowance limit are subject to tax. It is applied in one of three ways:
You will be tested each time you access your pension benefit.
If you are subject to tax, your pension provider will automatically deduct it before they begin to pay you your pension. If that happens, you will also need to declare that tax by submitting a self-assessment tax return.
There is a way to protect your pension from the lifetime allowance. You can apply for pension protection if the value of your pension fund was £1 million on 6 April 2016 – this is the date at which the allowance limit was reduced. There are a couple of options for pension protection. To find the one that best applies to your circumstances, talk to your pension provider or independent financial adviser.
If you are close to reaching your allowance limit but not quite there yet, one option is to stop paying into your pension fund. However, this may not be the right decision for everyone, and can be an unnecessarily drastic one.
Remember that allowance limits change year-on-year. It may be that if you are close to the limit but not due to retire until the following year, the allowance limit could be raised enough to mean you are no longer in danger of breaching it. How you draw down on your pension will be an important consideration as well. If you can phase your tax-free cash and income, you could delay reaching the limit by taking advantage of the annual increase in the allowance limit.
An alternative is to draw on your pension earlier than you planned (if you are eligible), to avoid it exceeding the lifetime allowance.
If you decide to stop paying into your pension bear in mind that you would also be losing out on employer contributions (if applicable). You would also stop benefiting from tax relief.
Before taking any action, find out whether this is likely to apply to you. Most people will not be affected, but as a long-term investment it may be that it is something you need to address later. Find out from your pension provider what the value of your pension is. Consolidate various pension pots if you have them to better help manage your investment.
Pensions can be confusing, and the rules do change, so it can be hard to stay on top of the details. It’s the job of our Plutus Wealth independent financial advisers to do that, so you don’t have to. Talk to us about pensions, lifetime allowances and how to make the most of your investments at any time by calling us on 020 7871 5200 or emailing us at email@example.com.