PART 4 - YOU’VE FINALLY GOT YOUR HEAD AROUND THE LIFETIME ALLOWANCE – NOW WHAT?
We’re delighted that you’re still with us on this journey.
You’ve reached the fourth and final part of our series on understanding the pension Lifetime Allowance. We hope, at the very least, you have gained a useful overview of what the LTA is, and an insight into some of the factors that might impact you when deciding when to take your pension – for example, age, time-frame, and whether or not you have additional investments or income streams to draw on.
So what next? Below are a few first steps you can take, and a few final thoughts.
PENSION LIFETIME ALLOWANCE (LTA)
So what can I do about the LTA?
The first step is to determine if there is an issue:
Value your pension funds for LTA purposes.
Consider what value your pensions might grow to between now and when you expect to draw on them, taking account of both anticipated future contributions (from you and any employer) and using an assumption for investment growth. Separately consider the likely increases in any DB scheme entitlement.
Compare 2 with a projected LTA value to determine if there might be an issue.
What other things should I consider?
For Defined Contribution schemes, is the period over which you will be invested long enough so that, even net of the LTA charge, it is worth continuing to contribute?
Is the period over which you will be investing long enough so that if the rules may change (again) in this area by the time you wish to access your funds, is taking the tax relief now on contributions attractive and worth considering, or are you happy to take your chances with the LTA down the road?
Bear in mind that pension contributions receive tax relief and pension funds grow tax-free. Therefore, even if the eventual tax rate is higher due to an LTA charge, the return you receive after tax could be attractive due to investment growth on tax- deferred funds.
If you ceased to be a member of the pension scheme, would your employer give you sufficient salary to compensate you?
For DC schemes, if you are concerned about exceeding the LTA, does taking a lower level of investment risk make sense in your pension? One could argue that to some extent it is like asking for less salary so that you pay less tax, but if you are holding lower-risk investments outside the pension, and higher-risk investments inside the pension, is there a case to effectively swap them around?
Defer taking any of the excess over the LTA for as long as possible – why not take funds up to the level of the LTA and, if practical, leave the balance untouched to age 75,
deferring and perhaps reducing the impact of the tax.
If you are in drawdown, consider taking more income before you hit age 75.
Everyone's pension situation is different and it's impossible to predict all scenarios. For most individuals with pension pots, you will only need to consider the LTA when you withdraw tax-free cash or reach age 75. But there are still other potential factors it's important to be aware of.
A downloadable PDF of this article is available, here.
For further information or to arrange an initial chat with us, please contact your nearest Carbon office or Richard Wadsworth, Director, Glasgow, at email@example.com
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