Pension warning: Britons ‘dragged’ into paying tax on pensions | Personal Finance | Finance
Breaching the Lifetime Allowance could mean Britons paying a tax charge of up to 55 percent on their retirement fund. Ian Pickford, Partner at Mazars, explained how people can avoid a shock bill when drawing their pension.
The LTA is currently set at £1,073,100, but will be frozen until at least 2026.
Mr Pickford said: “Thousands of people have been dragged into paying additional tax on their pension savings in the last decade.
“With the Lifetime Allowance threshold on ice until 2026, this upward trend won’t slow down, hitting both Defined Benefit (DB) and Defined Contribution (DC) pension savers, especially those with generous pension perks. It’s closer than many people think.
“Freezing the cap is effectively a punishment on saving into a pension, the very thing people are encouraged to do. And the reality is that a £1million pension pot won’t go as far as many believe.
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“Outgoings, like care costs or supporting children or grandchildren, have the potential to swallow up a large chunk of this, even just a short time into later life.”
With this in mind, Mr Pickford warned that planning ahead is crucial to help people understand if they are on track to breach the Lifetime Allowance and secondly, to weigh up the benefits of continuing to contribute to a pension against other ways of saving for later life.
He continued: “Increasingly, we are seeing people turn their backs on pensions as a means of income provision in later life, opting to use them as a way to pass down wealth.
“All the time your money is in a pension, it is growing free of income and CGT and for those lucky enough to have built up other savings, it’s likely a pension will be the last pot to access.”
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Mr Pickford also shared his tips of what someone should do if they think they might be heading towards the Lifetime Allowance threshold.
Review pension position
He said: “The very first thing is to see if you are at risk of breaching the Lifetime Allowance. This means knowing how much you have in each pension and using a calculator to work out your risk of breaching.
“Calculators, like the Mazars tool, can tell you your overall risk, the age you are expected to breach the limit and how much by, depending on your target retirement age. This will arm you with the detail you need to make some decisions.”
Assess other benefits
Mr Pickford urged those who are at risk to seek advice, as everyone’s circumstances are different and there is not a simple solution to this issue.
He said: “You will want to weigh up any other benefits which make footing the 25 percent or 55 percent tax bill more palatable.
“It might be generous employer pension contributions or you might be willing to accept the higher rate because pensions aren’t subject to income or CGT tax on pension investments while invested, which should boost your returns.”
Check for pension protections against an LTA charge
Mr Pickford said: “You may be able to use protection to lift your Lifetime Allowance limit.
“There are some rules around the timings of contributions and pension pot size but it’s well worth looking into these especially if you are a final salary scheme holder or have multiple pensions.”
When reaching retirement, use the LTA wisely
Mr Pickford encouraged Britons who have both final salary and DC pensions to consider the order in which they draw benefits and how their benefits are impacted by the Lifetime Allowance.
He explained: “The way the tax charge is applied can differ depending upon the type of scheme you draw from. Personal specific advice here is critical.”
Keep saving in but be ready for the tax bill
Mr Pickford concluded: “If you decide to keep saving into a pension, even though you expect to surpass the LTA threshold, be ready for the tax bill that will come.
“Your pension savings will be tested against the LTA at numerous times through your retirement, including every time you crystallise benefits before 75, death before 75 and when you reach age 75.
“Accessing your pension or hitting this milestone should be reminders that there might be a tax bill coming your way.”
