Feb 16, 2017 | Tony Byrne's View

If you have a final salary pension as well as a personal pension and you haven’t yet started drawing your pension benefits, especially if your pensions are reasonably well funded ones, you would be well advised to check whether or not you could be unwittingly caught by some swingeing tax charges. Why is this?

There is a tax charge on pensions valued at more than £1m (up to £1.8m for people who have already made claims to protect the previous higher allowance) currently known as the Lifetime Allowance (LTA). The tax charge is 55% of the balance above £1m when the pension benefits are claimed! In anyone’s language that is a swingeing tax charge. The LTA was supposedly created by the last Labour government to hit the socalled Fat Cats. The trouble is it now hits the Thin Cats.

Let me explain why.

Many people have benefited from being members of final salary pension schemes commonly known as gold-plated pensions, in particular public sector schemes. This is because of the guaranteed pensions they provide backed by the government. However, if you are lucky enough to have earned a good pension of say £30,000 a year but haven’t yet taken it and you also have perhaps 2 or 3 personal pensions worth say £200K then you are already close to the Lifetime Allowance limit. The reason for this is because a formula is used to calculate the value of your final salary pension which is basically 20 times the pension. So a pension of £30K p.a. is worth £600K for LTA purposes which combined with your personal pensions of £200K produces a figure of £800K which isn’t far short of the LTA limit of £1m. Within a few short years you could have pensions whose value has risen above the limit meaning that when you draw those pensions you could face a hefty tax charge.

If you think you are one of the people who could be affected by these tax charges then you really should seek advice from a professional pensions expert.

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.

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