Pension Awareness Day takes place each year. It is an award-winning campaign and the main aim is to encourage people to save enough to avoid walking into the pension poverty trap in retirement. You may have seen the blue Camper Van in your local town or city with the ‘Pension Geeks’ on board!
However, some investors are at the other end of the scale having accumulated significant pension savings and facing a different set of questions about the pension Lifetime Allowance (LTA). Without independent advice, some investors may find they are coming up with the incorrect answers and the result may mean that retirement funding is stopped too early.
There are several myths surrounding the LTA and we consider one of the most common here: –
Myth – Contributions must stop when you reach the LTA
The key word here is ‘allowance’. It is not a ‘limit’ to funding. There is nothing to prevent investors from continuing to pay in – you still have an annual allowance available of up to £40,000 (if not tapered for high earners or those in Drawdown) allowing you or your employer to make contributions and receive tax relief at your highest marginal rate. The LTA is not a barrier to pension saving or growth on the underlying fund. It’s the point where you look at what the likely tax consequences of this additional fund will ultimately mean.
In this way, it’s no different to any other allowance such as the personal income tax allowance, annual capital gains tax allowance or the dividend allowance – once breached, tax will be applied. Of equal importance for all employees, if funding is stopped, there may be no alternative form of remuneration on offer to replace the employer pension contribution. This can therefore considerably strengthen the argument to carry on funding. If an employer does offer alternative remuneration, remember this will be fully taxable and the residual amount to invest elsewhere will have suffered both Income Tax and National Insurance.
So, if you are concerned about the size of your retirement pot (firstly congratulate yourself on achieving a sizeable retirement fund!) then talk to us about the myths around the LTA. We can offer independent advice and explain the rules in simple terms to ensure you are not missing out on any additional pension funding you may be able to make.
Some basic facts – the LTA is £1.055m for the 2019/20 tax year and this will increase each year with inflation. The LTA is a limit on the total value of tax-relieved pension benefits that an individual can accrue without a tax charge applying. Benefits which exceed the LTA will be subject to a tax charge of 55% if taken as a lump sum or 25% (plus income tax) if taken as an income.
Please note, this article is for information only and does not constitute investment, pension or tax advice. Tax legislation and rules are subject to change.