Look After Your Pension, So Your Pension Can Look After You.
Pensions and savings are important to people, they are, after all, what they're going to rely on for quality of life over - hopefully - many years.
That's why it's so important to make sure that they're protected as much as possible. That doesn't just mean protection from poor investment choices or fraudsters - although this is obviously important. It's also important to protect these precious assets from neglect and ignorance of the various pieces of legislation and tax rules which can be a minefield for the unwary. The best way to guard against this is to always seek professional advice to regularly review your retirement strategy.
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The Lifetime Allowance for pensions is not something that affects a lot of people, but it's a good example of where not knowing the rules and not taking advice can cost you a great deal of money.
Basically, the Lifetime Allowance is the limit of the pension benefit that can be drawn from a pension - in form of a lump sum of retirement income - without triggering an extra tax charge.
Currently the limit stands at £1,030,000 up from £1,000,000 last year, and soon to be £1,055,000 from April 6th 2019. This needs to be considered when you access a pension benefit: when you draw benefits; if you die before taking benefits; or if a benefit crystallisation takes place. Then the value of your benefits is tested against this lifetime allowance.
If the value of your pension benefits, across all schemes, is greater than this allowance of £1,030,000, then any amount over that will be taxed at 25%, if it is withdrawn as income plus marginal rate of tax, or at 55%, if it is withdrawn as a cash lump sum.
However, to provide some compensation to those whose pensions were greater than the limit when it was introduced, two types of protection were introduced: Individual Protection and Fixed Protection.
You can apply for Individual Protection if your savings were worth more than £1m on April 5th 2016 and successful applicants will get a personal lifetime allowance to equal the value of their pension savings at that date, up to a limit of £1.25m.
You can apply for Fixed Protection if you or your employer haven't added to your pension since April 5th 2016, or if you opted out of any workplace schemes before that date. This will also give a protected lifetime allowance of £1.25m.
*Please note the following case study has been published with the use of a fictional character.
The sums involved can be significant. We had one client, Dennis, who had pension savings of £1.21m as of April 5th 2016. This was over the £1m limit at the time and he has contributed to his pension after that date, so we advised him to apply for individual protection. This gives Dennis an increased Lifetime Allowance which goes up to the amount he had in his pension at April 5th 2016, ie £1.21m.
Dennis has crystallised £400,000 of his pension, which has given him £100,000 tax free cash to spend or live on, with £300,000 remaining in his drawdown pot. By taking Reeves Independent's advice in applying for Individual Protection 2016, Dennis has used 5.777% less of his pension lifetime allowance than he would have had he not applied for the individual Lifetime Allowance protection. This will give him a tax saving in the long term.
The Lifetime Allowance is due to increase every year by the CPI measure of inflation, so in the tax year 2019/2020 it will be £1,055m.
You may not be affected by the Lifetime Allowance and the chances are you won't be, but you can be sure there are other ways of losing money to the tax man. An example of this would not be using the phased drawdown strategy as previously mentioned, but to withdraw your available tax-free cash from your pension. This may seem like a great idea in the short term, however, it may put you in a significant dis-advantage in the long-term. If you want an income above the personal allowance (currently £11,850), you will pay income tax at an earlier point of your retirement, giving the taxman more of your hard-earned provisions.
This area of pension planning can be complex, if you are worried about the Lifetime Allowance or any other aspects of your pension then please seek independent financial advice.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual's appetite for risk means that the advice for one person may not be the same for everyone. The information in this blog or any response to comments should not be regarded as financial advice. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover.