Tag Archives: pensions

Pension Lifetime Allowance – Take It To The Max

If you’ve been diligently saving into a pension throughout your working life, you should be entitled to feel confident about your retirement. But, unfortunately, the best savers sometimes find themselves inadvertently breaching their pension lifetime allowance (LTA) and being charged an additional tax that erodes their savings.

If you are a high-income earner or wealthy individual, you could be putting too much into your lifetime pension and risk exceeding the pension lifetime allowance. The government will maintain the pension Lifetime Allowance at its current level until April 2026, removing the usual annual incremental rises.

Pension Lifetime Allowance

The following questions and answers are intended to help you avoid this tax charge.

Q: What is the lifetime allowance?
A: The LTA is a limit on the amount you can withdraw in pension benefits in your lifetime before you trigger an additional tax charge. By pension benefits, we mean money you receive from your pension in any form, whether that’s a lump sum, a flexible income, an annuity income or through any other method.

This allowance applies to your total pension savings, which may be in different pensions.

Q: How much is the lifetime allowance?
A: In the 2021/22 tax year, the LTA is £1,073,100. This allowance has now been frozen until April 2026.

Q: What happens if you exceed the lifetime allowance?
A: Once you have received your full LTA in pension benefits, you will be required to pay an additional tax charge on any further benefits you receive.
If you take your remaining benefits as a lump sum, you’ll pay a tax charge of 55%. If you take your remaining benefits as multiple withdrawals, you’ll pay a tax charge of 25% on each one.

Q: How is the usage of your lifetime allowance measured?
A: Each time you access your pension benefits (for example, by purchasing an annuity, receiving a lump sum or establishing a flexible income), this is recorded as a ‘benefit crystallisation event’. There is an additional benefit crystallisation event when you turn 75, and finally, upon your death.

Q: Is lifetime allowance protection available?
A: You can only protect your pension from the LTA if your savings were worth more than £1 million on 5 April 2016. You may be able to protect your pension savings up to £1.25 million, or up to the value of your pension on that date, depending on the type of protection you have.

Q: Is it possible to avoid the lifetime allowance?
A: If you do not have LTA protection and you are approaching the limit, there are various actions you can consider. These include stopping your contributions (and, instead, investing your money into an alternative tax-efficient environment), changing your investment strategy or starting retirement earlier.

Q: Who does the lifetime allowance affect most?
A: The LTA affects high earners and those approaching retirement age the most, including those with defined benefit pensions. As the value of high earners’ pensions rises over the next five years towards a lifetime limit that will remain fixed, more and more individuals may find they need to stop contributing to avoid breaching the limit.

Q: When should you seek professional advice?
A: The rules around the LTA are very complex and making the right decisions can feel difficult. Receiving professional financial advice will help to identify if you have a problem and offer different solutions to consider, based on a full review of your unique circumstances.

The Importance of Financial Planning for Retirement

Financial planning is the key to shaping the retirement you want.

If you consider yourself to be nearing the end of your career and/or planning to retire within the next 10 years or so, then you should probably consider these financial planning questions:

> Am I going to be able to afford to choose when I retire?
> Is there a chance I might run out of money?
> How can I be sure I can enjoy the sort of retirement I’m hoping for?

However, planning for retirement is an often-overlooked aspect of personal financial planning, which can be a cause for concern as retirement starts getting closer and closer.

We’ve outlined some suggestions as to how to boost your pension savings and help achieve your retirement goals sooner.

Review your pension contributions
Sometimes the simplest solutions can have the most impact – and, if you want to beef up your savings for retirement, you can simply increase the contributions you make to your pension.

For example, those who are lucky enough to receive a pay rise broadly in line with inflation each year, who then make just a 1% increase in pension contributions, could potentially add thousands to their eventual pension pot, due to the power of compounding.

Of course, the earlier you invest your money, the greater the benefit you will enjoy from the effects of compounding. Increasing your contributions as early as possible just makes the compounding effect even larger, so careful financial planning for the long term is key.

Make sure you regularly review your strategy
Many pension holders are not aware that they can choose how their pension is invested and often just leave the decision in the hands of their workplace or pension provider.

In fact, you don’t have to hold a pension with the provider your employer has chosen. If you wish, you can ask them to pay into a different pension so you can choose the provider yourself, based on the type of funds they offer, the fees they charge and other factors such as ESG (Environmental, Social & Governance) considerations.

Also, a lot of pension providers can offer you several options for investment strategies. If you’re in the default option, you could achieve higher returns with a different strategy (though this will usually mean taking on more investment risk). Note that this may not be appropriate in all circumstances, particularly if you are close to retirement.

Make sure you understand your pension contribution allowances
When you save money in a pension for retirement, the government adds tax relief on top of the contributions you make, which helps you to grow your savings faster. But the amount of contributions on which you can claim tax relief each year are limited by an ‘annual allowance’. For the 2021/22 tax year, the limit is £40,000, or may be lower in some cases, so it’s important to take this into account.

It is also important to know that, if you’ve received a lump such (e.g. an inheritance, proceeds from the sale of a business or other asset…) and you want to contribute more than your annual allowance limit into your pension in one tax year, you can use any unused allowance from up to three previous years.

So, if you have £20,000 of unused allowance in each of the past three years, that’s another £60,000 on which you could claim tax relief for this year.

Tracking down lost pensions
Very often, starting a job with a new employer means starting a new pension and the pension they had with their last employer can be overlooked. As a result, it is surprisingly common for people to lose track of the pensions they had with previous employers.  Tracking down lost pensions, especially if contributions were made many years ago, can give a very significant boost to your retirement savings.

Old pensions can usually be tracked down via the provider, so make sure you check through letters and emails you still have from your past employer(s) to see if you can find your pension provider and/or policy number.

If you’re not sure, ask your past employer(s) the about the pension provider and, once you know the name of the provider, they should be able to find your pension by using details, such as your date of birth or National Insurance number.

For independent expert advice about pensions and planning for your retirement, please contact the Farnham-based Fish Saltus team today and we’d be happy to help!

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ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS-TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

Fish Saltus Guide To The State Pension

The State Pension is a vital source of income for millions of people across Britain.  However, the system can be complex and its important that you understand how it works. If you’re looking to maximise your income in retirement, a good place to start is with your State Pension.

Download your complementary Fish Saltus Guide to The State Pension here

Fish Saltus Guide to The State Pension Cover

Fish Saltus Guide to Self-Invested Personal Pension Schemes (SIPPS)

Download your complementary Guide to Self-Invested Personal Pension Schemes (SIPPS) today

Published in November 2021, this essential Guide to Self-Invested Personal Pension Schemes (SIPPS) explains the key features and benefits of this tax-efficient way of saving for your long-term future – and how to find to decide whether such a scheme is right for you.  Download here

Fish Saltus Guide to Self-Invested Personal Pension Schemes

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