TaxJun 6 2018

Prioritise retirement lifestyle

  • To understand some key points about the lifetime allowance
  • To learn how easily it can affect clients, especially people in a final salary scheme
  • To learn ways about avoiding hitting the lifetime allowance
  • To understand some key points about the lifetime allowance
  • To learn how easily it can affect clients, especially people in a final salary scheme
  • To learn ways about avoiding hitting the lifetime allowance
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Approx.30min
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Prioritise retirement lifestyle

After peaking at £1.8m in the 2010-11 tax year, the pensions lifetime allowance fell steadily, until the government recently increased it slightly to £1,030,000. Having tinkered with the formula almost incessantly since the allowance was first introduced, the allowance is now fixed to index annually in line with consumer price index inflation, as of April 2018. 

The allowance is important because it reflects the overall amount an individual can save into a pension over their lifetime while still qualifying for valuable tax breaks. In broad terms, pension savings are measured against the lifetime allowance at various stages, including when benefits are withdrawn and at age 75. Savers face tax charges on any excess.

The tax charge is designed to remove the tax relief that applies to pension contributions. A pension pot of £1.03m is a large sum of money to many people. To provide some context, a money purchase pension plan worth £1,030,000 today could provide an inflation linked pension annuity income of around £25,000 a year gross (before tax), for an individual aged 65 and wanting to provide a two-thirds spouse’s pension.  

Crucially, the allowance applies to all the pension savings one has, including any defined benefit or final salary schemes, money purchase schemes but excluding the state pension. 

It could be seen therefore that the lifetime allowance is essentially restricting tax relief to providing a reasonably moderate pension income. While the Treasury has had to make difficult decisions as to how and where the UK’s taxes should be deployed, it is fair to say that many have criticised the lifetime pension allowance as undermining long-term pension investing. For some, especially those in the public service such as NHS workers, it can be seen as unfair, as they have limited options for managing the lifetime allowance.  

In short, an increasing number of people will need to plan their pension arrangements very carefully as many, and especially those with DB pension schemes, are likely to be caught by the lifetime allowance and will have to pay a lifetime allowance tax charge.

Key Points

  • The lifetime allowance is set at £1.03m, increasing with inflation
  • It is very easy for public sector workers on final salary schemes to hit the lifetime allowance
  • Clients need to be mindful of how easy it is to generate a tax charge
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