Lifetime Allowance Planning

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

In summary the Lifetime Allowance (LTA) is the maximum amount that can be accumulated in all pension plans without incurring a tax charge. On certain events the pension funds are ‘tested’ and once the LTA has been used up there is a tax charge on the excess at 25% or 55%.

In total there are 13 different events that can cause a test against the LTA with the main ones being:

  • The taking of benefits
  • Death
  • Upon reaching age 75

The current LTA is £1,073,100 and is set to increase at Retail Price Index (calculated at the preceding September) at the start of each tax year. The LTA for the 2021/2022 will increase to £1,078,900.

The charge is only incurred once all the LTA has been used up and the level of tax depends on how the excess is taken. The tax is charged on the excess and if paid as a lump sum it is 55%, if paid as income it is 25% – whilst potentially not completely avoidable, a charge of 55% in my view, should very rarely be incurred.

Whilst funds of over £1 million may seem a lot it is easily achieved, especially if in receipt of a Final Salary (or Defined Benefit) pension scheme. For Final Salary schemes, a multiple of the income being received (plus any tax free lump sum received) is used rather than simply a fund value.

There are further complications if any pension benefits were taken before 6th April 2006. In addition, in some circumstances a fund can be tested twice against the LTA which means it is important this is carefully monitored.

There are a number of different ‘protections’ which have been available in the past which could mean a higher LTA is applied, some of these are lost if contributions are made and so again it is important this is reviewed. There are instances of individuals being automatically enrolled into pension schemes or certain Group Life contracts which has meant their protection has been revoked.

The LTA can be a complicated area to navigate, whilst the charge can be paid from the pension fund it is important to make sure the ‘right pension’ pays the charge. For example, it may not be beneficial for a final salary scheme to pay the charge as the guaranteed income may be reduced.

These are a few of the factors that could impact LTA planning and it is important when approaching the limit all pensions are reviewed. There could be instance on death where the fund goes above the LTA and a 55% LTA charge is levied, this can be avoided with the right financial planning.

If you feel that your funds could be approaching the LTA limit or would like to discuss your financial planning please contact me for a free no obligation discussion.

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26 Apr 2024

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