6th February 2018 at 12:00pm
Having a decent pot of pension savings is a great way to help you live your life how you want in the future.
That’s why the first increase in the pension Lifetime Allowance for 7 years is good news if you want to build up a bigger pension pot.
You’ll now be able to save £1,030,000 over your lifetime without needing to pay an extra tax charge on savings above that.
The £30,000 increase, which starts from 6 April 2018, means some people could pay less tax and keep more of their savings.
Here’s our short guide to the new Lifetime Allowance to help you make the most of your savings.
What the new Lifetime Allowance could mean for you
“From April 2018, the allowance is due to go up each year to match inflation, so your allowance isn’t likely to be what that figure is now,” explains David Downie, one of our technical pension experts here at Standard Life.
“It’s what it will be in the future, when you retire.
“For those taking their pension in stages, the really important date may be your 75th birthday – not when you stop working, or when your savings reach that amount.”
Making sense of your allowance – and why it’s not a limit
“It’s just the point at which the tax treatment on your savings changes,” explains David Downie.
“When your pension savings are worth over the allowance you may have to pay a tax charge on the slice of your money above that figure when you take your pension.
“That’s the important thing. You only pay it when you start to take pension savings over and above the allowance – not when your savings reach that figure.
So, if your pension savings are likely to go above the allowance, should you keep saving?
“It comes down to your own circumstances but it only makes sense to stop if you have a better option for your money. For some, it might be better to carry on saving in even if they end up paying the tax charge.
“If you’re in a workplace pension, you might not want to give up any pension payments from your employer,” adds David Downie.
“If you stop paying in, they might too.”
How do you know if you’re likely to save more than your allowance?
It makes sense to get to know your pension – or pensions – so you can keep track of how much you have, whether you’re likely to save more than the allowance, and decide what you want to do.
If you’ve got an adviser, they’ll help you know what you’ve saved and what your benefits might be worth at the age you plan to retire. If you don’t, you can ask your pension provider, or go online to check your plans.
When you do take your pension savings over your allowance
If you do take pension savings which are over and above your allowance, your pension provider will let you know how much tax you owe and take it off before you get your money.
You’d need to let HMRC know about this on your Self Assessment tax return.
It’s worth highlighting that any savings above the Lifetime Allowance can’t be taken as part of your tax-free cash.
How much tax are we talking about?
It depends on how you take your savings. Take that ‘excess’ amount as income and you’d pay an extra 25% tax on savings above your allowance.
You’d also need to pay income tax on it too.
Take it as a lump sum in one go and it’s 55%, which is a sizeable amount of tax, which is why it makes sense to do some planning around this.
Getting advice on how you take your retirement income and using your tax allowances can really help reduce how much tax you pay.
The age factor: Things to think about when you reach 75
When you reach the age of 75, you’re not just clocking up three-quarters of a century. It’s an important milestone when it comes to pensions and tax.
You may have to pay the Lifetime Allowance charge on any pension funds you haven’t taken.
When it comes to passing your pension on when you die, if that’s before the age of 75, any unused funds can typically be paid to your beneficiaries tax free.
However, there could be a charge on any funds which haven’t yet been tested against the Lifetime Allowance.
After 75, there are no more Lifetime Allowance charges. Your named beneficiaries pay income tax on what they inherit.
Where to find out more
We know there’s a lot to think about when it comes to understanding tax and your pension.
Talk it through with your adviser if you have one to plan how to manage your money. If you don’t have one you can find one at unbiased.co.uk or find out more on our website.
Tips for managing the Lifetime Allowance
- Get a clear view of all your pension pots and find out if you’re likely to reach your Lifetime Allowance. You can read our online tax guides to find out more.
- If you have a defined benefit (DB) work pension, it counts towards your Lifetime Allowance.
- You can work this out by multiplying your annual income from this type of pension x 20.
- So if you’re due to get a pension of £30,000 a year when you start taking your pension, this counts as £600,000 of your Lifetime Allowance.
- Remember, with the Lifetime Allowance due to go up by inflation each year (based on the government’s CPI measure) it will be higher in the future, although this may not be the case for ever.
Remember that a pension is an investment. Your savings are invested, which means that they have the opportunity to grow over time. As with all investments, the value can go down as well as up, and you may get back less than you paid in.
Laws and tax rules may change in the future and your own personal circumstances will have an impact on tax. The information here is correct in February 2018 and shouldn’t be taken as financial advice.