According to a recent article by the Telegraph, amongst other pension taxes, the UK government have plans to reduce the pension lifetime allowance, again! This will impact millions of savers via a Lifetime Allowance Tax Charge. There are suggestions that the lifetime allowance could be reduced from the current £1,073,100 to just £800,000. It’s only 10 years ago that the LTA was £1.8m and before 6 April 2006, there wasn’t one. Follow this link for the history of the Lifetime Allowance (LTA).
Very simply, the LTA is the total amount that you can accrue in pension benefits before being subject to a tax charge when you retire and take those benefits. The type of pension that you have will affect how the total benefits are calculated but for most people the calculation is the total amount of pension benefits that you have in your pensions. Rather than looking at the value right now, you’ll need to project this total forward to your retirement date as this is when the test will occur.
When you take benefits from your pension, if the amount that you crystallise* is in excess of the LTA and taken as a lump sum, you could be subject to a 55% tax charge on the excess. On the other hand, you are subjected to 25% if taken as income. 55%!
Not only is there potentially a huge tax liability but the level of income potentially available to a pensioner with a pot of £800,000 vs £1,073,100 is approximately £12,500 p.a. less. That’s £1,000 less, before tax, each month.
There are likely to be some protections available to those who’s benefits are likely to exceed a reduced LTA but every person has a unique position and so there’s no “one size fits all” solution when it comes to your personal position. It’s vitally important that you’re aware of your options and that you have a plan in place so that you know how to tackle your position. You should seek advice as early as possible when it comes to your pensions.
For example, it’s still possible to apply for protection from when the government last reduced the Lifetime Allowance to £1m, back in 2016. Fixed Protection 16 (FP16) is available to anyone who hasn’t made a pension contribution since 5 April 2016 (which will apply to many expats) and this gives you an LTA of £1.25m, rather than the current £1.073m. An extra £177,000 in your pensions before a potential 55% tax charge could save up to £97,295 in taxes!
You can also apply for Individual Protection 16 (IP16) which protects your LTA to the lower of; the value of your pensions on 5 April 2016 or £1.25m. Contributions can continue to be made under IP16. Further info on the protections currently available can be found here.
Another option is that you could establish a Qualifying Non-UK Pension Scheme (QNUPS) where the LTA doesn’t apply. Benefits contributed to this scheme would not fall under the LTA and any charges applicable. Since a QNUPS falls under UK Inheritance Tax laws, any contributions and growth would also be outside of your estate for tax purposes. £1m contributed to a QNUPS from non-pension assets could present an immediate £400,000 in IHT savings as well as future LTA tax charge savings.
Pensions are a complicated area and so it’s always best to seek advice and avoid the minefield of potential pitfalls. A financial planner can help you structure your pensions in a tax efficient manner for now and the future. If you have any questions regarding your pensions and your options, please feel free to contact me here.
*This is subjected to a number of rules which can be found here.
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