27 January 2020

Consider the spectre of the LTA charge when looking at pensions

The number of pension savers paying the lifetime allowance charge has risen sharply over the last decade. In the 2006/07 tax year, only 750 people were subject to the charge on accumulated retirement savings, but in 2017/18 the figure had risen to over 4,500.

The lifetime allowance (LTA) charge is essentially a tax levied on a person’s pension savings. It is only applied when the combined value of a person’s pensions is higher than the Lifetime Allowance for the tax year in which the calculation takes place.

The allowance is currently £1,055,000, and this is due to rise in line with inflation each year. At its peak in 2010/11, the allowance was £1,800,000. This helps to explain why more people than ever are paying the charge.

The rules around when the calculation occurs are complex. There are thirteen trigger “events”, including taking benefits from a pension fund and reaching age 75. If a calculation is triggered and the combined pension savings are higher than the current Lifetime Allowance, a tax charge of up to 55% could be levied on the excess above the allowance. This combined pension figure includes the value of any final salary pensions built up with an employer, as well as personal and group personal pensions.

The charge is understandably unpopular with many who feel that it is at odds with the government’s aim of encouraging the nation to save independently for retirement. The punitive charge is in addition to any tax charge that savers may be subject to if they accrue benefits of more than the annual allowance while they are accumulating their pension provision.

Planning around the LTA charge is complicated, but not impossible. It is worth planning in advance how and when you should access your pension savings and considering other taxes, such as income tax and inheritance tax, to work out the best option for you.

It is worth remembering that any funds left in plans like a self-invested personal pension at the time of your death can normally pass to your nominated beneficiaries without inheritance tax.

A financial planner can advise you whether you are likely to fall foul of the LTA charge, and more importantly, what, if anything, you can do to minimise the impact of the charge on your retirement savings.

Liam Kerr is a Chartered Financial Planner with Carbon Financial Partners and can be contacted on 01224 633263 with any questions you might have.

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The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.

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