Hello and welcome.
My name is Ian Schofield and today I’m chatting to our pension expert, Bob Gordon, about the pension lifetime allowance.
So Bob, what is this and how does it affect my pension?
It’s a tax allowance that limits tax breaks on very large pension pots. From 6 April 2019, the standard allowance is one million and fifty-five thousand pounds. This goes up each year with inflation. And some people may have an even higher personal allowance. This means most people won’t be affected by the allowance and can save as much as they can reasonably afford into their pension without worrying about it.
So, what happens if my pension pots do go over my lifetime allowance?
Like any tax allowance, if you go over it you’ll pay more tax. But you only start paying the extra tax when you actually access pension savings above your allowance – not just when your pension pot reaches it.
That’s reassuring, so what tax will I pay if I go over my allowance?
It depends on how you access your money Ian. If you take the excess as a lump sum, you’ll pay 55% tax. Or if you use your money to provide an income, you’ll pay 25% tax plus income tax at your usual rate. This again adds up to 55% tax if you’re a higher rate taxpayer. Or 40% if you pay basic rate tax in retirement.
It’s worth noting that around 6 out of 7 people who pay higher rate tax when they’re working don’t pay any higher rate income tax on their pension.
And, particularly since pension freedoms, you may have more choice over how and when you take your money. This can help you manage how much tax you pay, and when you pay it.
If I think my pot might go over my lifetime allowance, what should I do?
It’s not an easy decision, the lifetime allowance rules are really complicated. And it’s important to get it right so you don’t pay more tax than you need to. Stopping paying into your pension could mean you miss out on pension tax relief and pension payments from your employer. Even with the extra tax from going above the lifetime allowance, your pension might still give you a better result than other saving options.
What’s right for you really depends on your circumstances. So my top tip is to talk to a financial adviser who will help you work out what’s best for you.
Bob, thanks for giving us lots to think about today.
To everyone listening, thanks very much for joining us. And remember, tax rules can change and what they mean for you depends on your circumstances. And as with all investments, the value of your pension can go down as well as up and there’s always a chance you might get back less than was paid in.