For those who haven’t heard of this before, the Lifetime Allowance (LTA) is the amount that a UK individual can hold in a registered pension arrangement(s). Now the LTA is £1.055m and it is set to increase with CPI every year.
This sounds like a big number, and if you have just started saving into your pension you probably can’t imagine ever reaching it. If you are a member of say, the NHS Pension Scheme, this equates to a pension of just short of £46,000 per annum.
For those who are a bit further on with their pension saving there are lots of rumours around about the LTA so here are some handy takeaways:
Myth 1 Contributions must stop when you reach the LTA
The key word is “allowance”. It’s not a limit to funding. You can still pay in and contributions subject to the Annual Allowance.
Myth 2 There’s a tax charge to pay as soon as the LTA is reached
Nope. When individuals hit the LTA, nothing happens. There’s no immediate penalty. A tax charge is only incurred when benefits are “crystallised” i.e.. if you were to take the benefits from a final salary scheme, purchase an annuity or start drawing down your pension flexibly.
Myth 3 The LTA charge is applied when you start to take your benefits
No. Only if what you take out of your pension takes you over the LTA. A good example:
Mr Smith has £1m in his pension pot. Upon retiring he wants to repay his mortgage and has allocated his permitted 25% tax free cash for this purpose. He asks his provider for £250,000. To get this amount he has to “crystallise” 100% so £1m. The remaining £750,000 is allocated to his drawdown “pot” and anything he then takes out of it will be taxed at his highest marginal rate. NO LTA charge.
Myth 4 The penalty for taking benefits in excess of the LTA is 55%
No, 55% is only payable if the excess over the LTA is taken as a lump sum (or series of lump sums). If the individual moves it to their drawdown pot instead, only 25% will be payable. Please remember that you won’t get a demand notice from HMRC, this will go to your provider who will pay the tax from your fund.
Myth 5 On death there will be another LTA test on funds in drawdown
No. There is no second LTA test on death for funds already crystallised. If an individual dies before 75 their beneficiaries will inherit the pot tax free and they can take a tax free income from it. Death post 75 means that any funds that the beneficiary withdraws will be taxable at their highest marginal rate in the year of receipt.
As you can see, the legislation introduced over the past few years has made accessing your pension more flexible but some of the rules are complex. If you have any questions or are concerned about the Lifetime Allowance, we can help.