The Budget announced that the pension Lifetime Allowance, along with the ISA allowance, income tax and capital gains tax (CGT) rates will be frozen until 2026.
Although not increasing tax rates was a decision welcomed by many, between now and 2026 many people will find themselves paying more tax as their incomes and pension funds rise.
Lifetime Allowance (LTA) is a limit on the amount of pension benefit that can be drawn from a pension without having to pay an extra tax charge.
The current LTA is £1,073,100, and it is due to stay at this rate until 2026. The LTA charge is 25% of the excess over the limit on any income taken and 55% on the excess if it is taken as a lump sum.
The LTA tax charge only affects those with the largest pension pots. The table below is an illustration of when someone could breach their LTA.
|Pension value today||3% Annual return||5% Annual return||8% Annual return|
|£500,000||25 years & 10 months||15 years & 7 months||9 years & 10 months|
|£750,000||12 years & 1 month||7 years & 3 month||4 years & 8 months|
|£1,000,000||2 years & 4 months||1 year & 5 months||11 months|
These are based on returns after charges and not guaranteed.
Looking at the table above, you may think about stopping pension contributions. However, this may not be wise especially if you are a higher or additional rate taxpayer and/or if you have a large Inheritance Tax liability.
Although a prolonged period of no increases means more LTA tax charges, it’s vital to remember that there could be many good reasons why those affected should continue to save into their pensions.
If you need any assistance with LTA, please get in touch with Görkem Gökyiğit, (firstname.lastname@example.org).