Financial Focus: A New Tax Year – What does this mean for Pensions & Taxation?
Its Spring, and the year ahead looks more promising than the last. However, there is a way to go and whilst the Government decide where to spend, they are also ensuring payback.
So, as much as Spring and better days are on my mind, it is also a new Tax year and I write in context of pensions and taxation.
Chancellor Rishi Sunak last month froze the pensions lifetime allowance (LTA), capping the amount individuals accumulate within a pension before incurring tax charges. Previously to this, the LTA was set at £1,073,100 for 2020/21 and was due to rise according to inflation, but freezing it adds numbers to the Treasury’s balance sheet. According to the government, the freeze will net the Treasury £990m by 2025/26.
The government’s complex system of pensions allowances has been a battleground for many years, and it’s amazing how much pensions are continuously tinkered with. Not only do you need to navigate your annual allowance but keep a close eye on the lifetime allowance too.
And it’s not straightforward either!
I am assuming you are not one of the people who have protection the government offered, which at one time was set at £1,800,000. This article cannot cover everything however, if you have Protection, you would have a Protection Certificate and been advised of the amount and whether or not you had enhanced, fixed, fixed 2016, primary, or individual protection – simple it is not!
What counts towards your allowance depends on the type of pension pot you have. (Source: Gov UK) Do note you may have a mix of these.
1. Type of Pension Pot: Defined Contribution – personal, stakeholder, and most workplace schemes. What counts towards your lifetime allowance: Money in pension pots goes towards paying you, however you decide to take the money.
2. Type of Pension Pot: Defined benefit – some workplace schemes.
What counts towards your lifetime allowance: Usually, 20 times the pension you get in the first year plus your lump sum – check with your pension provider.
Tax by another Name?
So, what is the pension lifetime allowance charge? Any amount you have in your pension above the lifetime allowance is subject to a tax charge. It is a one-off charge of 25% if paid as pension (meaning that you buy an annuity or take a regular income through a drawdown plan), or 55% if paid as a lump sum.
The charge can be applied in either of the two ways or a combination of both depending on how you take the excess benefits above the lifetime allowance. In Addition, you would pay income tax as normal, at the rate applicable.
Could this apply to you? In this scenario, a person aged 50 intending to retire at aged 65, has a personal pension plan currently valued at £500,000, with an assumed intermediate growth rate of 5.5%. As you can see, the projected value is £1,116,238.31, exceeding the current lifetime allowance.
Pensions as with all planning should be reviewed regularly.
Written By: Jacqueline Lee-Lis LLB (Hons), APFS, EFP
Chartered Financial Planner | European Financial Planner – www.financialobserver.co.uk
Please note, this article contains general information only and is not to be construed as advice for any personal planning. The above scenario is for illustrative purposes only, advice should be sought regarding your individual circumstances.