Pension lifetime allowance causes ‘major threat’ for savers – how to avoid loss | Personal Finance | Finance
The Lifetime Allowance is the limit on how much people can build up in pension benefits over their lifetime while still enjoying the full tax benefits. If someone goes over the allowance, they’ll generally pay a tax charge on the excess at certain times.
On the MeaningfulMoney Youtube channel, chartered financial planner Pete Mattew discussed ways that people can avoid going over the Lifetime Allowance.
The lifetime allowance for most people is £1,073,100 in the tax year 2022/23 and has been frozen at this level until the 2025/26 tax year. Exceeding the limit means Britons could be subject to a 55 percent tax.
The allowance applies to the total of all the pensions people have, including the value of pensions they have through:
- Any defined benefit (final salary or career average) schemes people belong to
- Any savings they have in defined contribution pensions, but excludes their state pension.
Mr Matthew said: “The pension Lifetime Allowance can seem like a major threat if you have a large SIPP or personal pension, or if you have a decent defined benefit income.
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“But there are planning angles to consider which might help you to reduce the impact of the lifetime allowance.”
When discussing defined contribution pensions, he discussed the “real benefit” of having a partner and joining pots.
He said: “Defined contribution pensions are the types of plans where you build up a fund of money that you can eventually crystallise and take money out from in retirement.
“If you’re likely to go over the Lifetime Allowance, and you have a spouse or partner, you could consider paying into their pension instead.
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He added: “You have to balance the income tax payable on the income you take against the potential lifetime allowance charge down the line. Sometimes it’s clear cut – you should do one or the other.”
Britons are urged to see a financial planner before doing things they may not fully understand.
Moreover, another way to avoid hitting the Lifetime Allowance is by using other saving vehicles other than a pension.
Mr Matthew said: “People can save in other ways than a pension. If you are getting closer to the lifetime allowance you start redirecting money that you would have paid into your pension into something different such as a venture capital trust.
“You should definitely be using your ISA allowance of course. There’s no tax relief on money going into a ISA, but there’s no tax coming out either.”
Britons can save tax-free with Individual Savings Accounts (ISAs).
There are four types of ISA:
- Cash ISAs
- Stocks and shares ISAs
- Innovative finance ISAs
- Lifetime ISAs
In the 2022/23 tax year, the maximum people can pay into their ISA is £20,000.
This limit must be split between each ISA account that people have many.
More information can be found on the MeaningfulMoney website.
