Complex lifetime allowance rules leading to breaches

Published  by Forrester Boyd Wealth Management

The lifetime allowance (LTA) is a limit on the amount of pension benefit that you can draw from your pension scheme whether in a lump sum or as retirement income and which is exempt from tax.

Originally introduced in 2006, the LTA has increased in line with inflation. According to official figures back in the 2011/12 tax year there were 940 cases of lifetime allowance breaches. Fast forward to 2017/18 and those breaches increased to 4,500 with a staggering value total of £185m[1].

For the tax year 2020/21 the lifetime allowance stands at £1,073,100. Whilst one million pounds may sound like a lot of money, research published by Royal London in 2019 estimated 1.25 million people were on course to breach the LTA by the time they retire[2].

With such a complex piece of legislation, it is unsurprising there are a rising number of breaches.

Do not fall foul of the LTA

The salary levels for those most likely to be affected range from £60k – £90k pa and more likely to affect Defined Benefit pensions and Defined Contribution pensions. Considering the numbers above in relation to people who are potentially on course to breach the LTA, Financial advisers at Forrester Boyd Wealth Management explain what savers should be considering now in order to make the most of their pension pots. Any breach of the LTA could lead to a potentially hefty tax bill.

There are a number of scenarios that could lead to a lifetime allowance test being initiated and a possible tax charge. These are commonly known as benefit crystallisation events (BCEs). HMRC defines a number circumstances in which a BCE can arise. You can read them here.

If you do go over your lifetime allowance, tax is charged at 55% if you take a lump sum or 25% if you take an income from your pension. This is quite a substantial chunk of your pension that you could potentially lose. If you think that you may be at risk of breaching your LTA then we would definitely recommend getting professional advice. The cost of the advice will more than likely outweigh the losses you could make without it.

A financial adviser will help to try and mitigate any potential tax charges. However, there are some reasons when it may be better to exceed your lifetime allowance. So please, do take specialist advice to find out what is best for you and your personal situation.

If you would like to speak to one of our financial advisers, please contact us.

The value of your investment can go down as well as up, and you can get back less than you originally invested.

Past performance or any yields quoted should not be considered reliable indicators of future returns. Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions.

[1] view source [2] view source