Should you continue paying into your pension after exceeding the Lifetime Allowance?
A number of clients have approached me in recent years and asked me whether or not they should continue contributing into their pension after exceeding the Lifetime Allowance. The answer isn’t straightforward because it very much depends on each individual’s personal situation because everyone’s personal financial position is different.
For those of you who are unaware of what the Lifetime Allowance is, let me explain. The Lifetime Allowance or LTA was introduced by the Labour government on 6 April 2006 on so-called “A Day”. This day was also known as pension simplification. I was always cynical about this because the last thing the government ever wants is simplification. I interpreted it as increased taxation of pensions and unfortunately I was proven right.
Basically, the Lifetime Allowance is a tax charge on individuals who have what the government considers to be large pensions. It was originally designed to attack the “fat cat” bankers in the City who kept being awarded amazingly large pensions by their companies. Unfortunately the LTA has reduced in subsequent years by the Conservative government after it reached a high of £1.8 million at one stage. It then reduced to £1 million at one stage, but it is now linked to inflation so it has increased to £1,055,000 over the last 2 tax years.
If, you take your pension benefits and they exceed £1,055,000, you will pay additional income tax of 55% on the tax free cash lump sum or 25% on the income. So, the tax penalty is very high indeed. There are numerous so-called Benefit Crystallisation Events or BCEs that can trigger the tax charge. There are many tax traps for the unwary. It is a truly pernicious stealth tax. Of course, the Prime Minister, the Chancellor of the Exchequer, the Speaker of the House of Commons and judges don’t mind. They are exempt from the charge. Doctors may be exempt from the LTA tax charge in the future too, because they are retiring from the NHS in droves in order to avoid the high tax penalties. It’s called the law of unintended consequences. You really couldn’t make this sort of stuff up. It’s Yes Minister style legislation.
Having created numerous cash flow plans for clients with various ‘what if’ scenarios including remaining in the final salary pension scheme, ceasing membership, taking a salary in lieu of employer contributions, retiring later etc, we have become very skilled at guiding clients into making the best decisions for them, which is the one that increases their cash flow the most even if that means paying an LTA tax charge, even an increased one.
So, if your pension is likely to exceed the Lifetime Allowance in the future, or has already done so, why not contact us for advice on how to minimise the impact of the LTA on your pension? You know it makes sense.