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Regular pension reviews are important to ensure you’re on track to hit your aspirations. Identifying a potential shortfall early can be invaluable in adjusting your investments to ensure your retirement is everything you wish for.

With that in mind it’s important to keep on top of the UK Lifetime Allowance (LTA).

In essence, the LTA means that:

  • You are liable for a 25% pension tax on your savings over the threshold.
  • Lump-sum withdrawals are taxed at up to 55%.

It’s crucial to know what your pensions are worth and the actions available if you’re concerned about hitting the LTA and experiencing a severe dent in your retirement savings.

Let’s explore how the LTA works and what you can do to avoid unnecessary tax exposure.

The UK Lifetime Allowance Explained

As a basic theory, it might feel like the best way to prepare for retirement is to save as much as possible. The problem is that saving too much might attract hefty UK taxes.

In 2021/22, the LTA is £1.073 million, a rate that has been frozen until 2026. There isn’t a lower or upper limit on your pension savings, but you must understand the impact of your fund going above that limit.

If you have a pension worth over the cap, you’ll pay 25% tax on pension payments or cash withdrawals, or a staggering 55% if you draw on your pension as a lump sum.

Your allowance applies to all pension products, including:

  • Personal pensions
  • Workplace schemes
  • Defined benefit products
  • Defined contribution pensions

However, the State Pension is outside of the scope of LTA, so the tax payable on exceeding the allowance applies only to other pension funds – but on top of income tax.

If you’ve already started drawing a pension, the calculation becomes more complex because the value already drawn is deducted from your allowance so it is important to know your anticipated pension withdrawals and the associated charges.

How to Assess the Future Value of Your Pension

The calculation itself sounds easy enough – but knowing the expected value of your pension may not be.

To assess your pension scheme fund, you can work through these steps below or consult a Chase Buchanan adviser who can help construct a bespoke pension forecast:

  • Collate details of all pension schemes, savings, and investments in your portfolio.
  • Request an estimate from every provider to predict the valuation.
  • Access your State Pension statement to factor this income into your assessment.

The correct approach depends on the nature of your pension products. For example, a defined benefit scheme or defined contribution plan may have very different effective future values.

It’s crucial to include savings and investment accounts in addition to your pension since they will also generate an income. That includes rental properties, investment products and cash savings.

Without updated forecasts, it’s impossible to know if you should continue making contributions or whether you’re getting close to the LTA and need an alternative strategy to protect your financial security.

How to Manage Your Pension if You’re Approaching the Lifetime Allowance

The current LTA cap has dropped sharply, from £1.8 million in 2010/11, so if you suspect you are approaching the limit or have reached it, you’re far from alone.

In the good news, you won’t attract an immediate LTA tax bill until you reach a crystallisation event – which could be when you:

  • Begin drawing pension income
  • Receive a lump-sum payment
  • Purchase an annuity
  • Hit age 75

Pensions are tested against the LTA cap at any of these events or if an individual passes away. Therefore, you need to know the anticipated value before drawing on your fund. Keeping within the allowance isn’t always easy, particularly for expats with multiple schemes in different jurisdictions, with varying pension benefits payable.

If you’re considering paying the 25% LTA tax charge, we’d strongly recommend seeking professional guidance. There are several potential options, perhaps to cease contributions, take your pension benefits sooner, or redirect your payments to alternative investment products.

HMRC Lifetime Allowance Protection

One possible solution is to apply to HMRC for LTA protection – but the conditions are strict, and this isn’t always an option.

You can apply for this protection if you had pension savings worth over £1 million at the start of the 2016/17 tax year, and there are various protection categories. It’s wise to seek professional guidance if you think you may be eligible and ensure you apply for the correct type of LTA protection.

ROPS Pension Transfers

Another route for expats is to look at Recognised Overseas Pension Schemes or ROPS. There are qualifying ROPS in many countries, but any scheme you transfer a UK pension to must be on the HMRC approved list – which changes often.

You’d still need to pay 25% on any fund balance over the LTA, but after a transfer, you are exempt from further penalties. This solution can be highly beneficial for expats with existing British pensions that are close to the LTA.

Transferring offers multiple benefits such as tax efficiencies and greater flexibility, and means you can continue making contributions as you wish with no upper limit to worry about. As always, professional wealth management advice is crucial, as there is the potential to expose your pension finances to an Overseas Transfer Charge, taxed at 25%.

SIPPs Pension Transfers

Another way to retain your pension assets is to look into Self-Invested Personal Pensions (SIPPs).

These schemes don’t change jurisdiction, so you won’t need to pay an Overseas Transfer Charge, and provided your fund is below the LTA cap at the point of transfer, you can steer clear of the 25% levy.

However, the issue here is that you remain liable for LTA penalties when you start taking pension benefits or when they pass to your heirs. Hence, it’s still critical to evaluate the pros and cons very carefully.

Choosing the Best Solution to Avoid Triggering the Lifetime Allowance

The right way to manage your pension assets will depend on the following factors:

  • Whether you are already taking your pension or not.
  • How much you currently have invested in your retirement.
  • When you plan to retire, if not already.
  • How quickly you want to access pension benefits.
  • Where you live, and where you plan to retire.
  • What sort of pension products and other assets you own.

We’ve summarised three of the primary options, but there are many other strategies, including investments outside of the scope of pension taxation and with comparable rates of return.

Please contact Chase Buchanan to discuss suitable options, and for help to manage your pension tax exposure beneficially.