What the Lifetime Allowance freeze could mean for you

In recent months, the Treasury has been under significant pressure to raise money in order to cover the costs of the government’s pandemic relief measures. To fill the “black hole” in the public finances, chancellor Rishi Sunak has had to make some difficult decisions regarding taxation and allowances.

One of the most notable takeaways of his Spring Budget was that he is freezing the Lifetime Allowance (LTA) at £1,073,100 until April 2026. According to data published in Citywire, this move is expected to raise £990 million for the Treasury over the next few years.

If you have been dutifully saving into your pension, you may be wondering what this freeze could mean for you. Read on to find out everything you need to know.

The LTA is essentially how much you can withdraw from your pension without additional tax charges

When it comes to your retirement, the Lifetime Allowance is one of the most important limits that you need to bear in mind. Essentially, this is a cap on the amount that you can withdraw from your pension without triggering a tax charge.

When the government first introduced it in 2006, the threshold stood at £1,500,000 and rose to a peak of £1,800,000 in the 2010/11 and 2011/12 tax years. Since then, however, it has fallen to only £1,073,100 in the 2021/22 tax year, where it will remain until at least April 2026.

It is also important to be aware that the LTA covers the total value of your pensions, not just an individual pension fund. This includes your contributions, your employer’s contributions from your workplace pension, government tax relief, and investment returns.

When you take benefits from your pension, HMRC will apply a Lifetime Allowance test. If the value of your combined pensions is greater than this limit, you may have to pay a tax charge on the value above the threshold.

This tax charge is typically 55% on any excess taken as a lump sum, or 25% if you take it as regular income.

The risk of breaching the LTA could impact your desired lifestyle in retirement

As we mentioned earlier, the government expects this freeze to raise around £990 million in additional revenue over the next few years. This will be raised in two ways: through the LTA charges paid by those who exceed the limit, and also in savings on tax relief, as those approaching the threshold may reduce their pension contributions.

While £1 million may initially sound like a reasonable limit for pension savings, it can pose an obvious problem for high earners.

According to figures from Canada Life, if you have a pension pot containing £469,000 and stopped making contributions today, you could still breach the LTA in only 20 years. This is assuming that the limit remains frozen until 2026 and increases annually by an average of 2% after that.

This means that even if you are less than halfway towards your LTA, you may be concerned about how the freeze could impact your retirement plans.

Working with a financial planner can help you to overcome any potential issues

While the Treasury’s reasoning for the LTA freeze may be understandable, the move could significantly impact your long-term plans.

If you breach the limit, the charges could eat into your hard-earned pension wealth when you come to make withdrawals. This could potentially mean that you may have to settle for a less comfortable lifestyle in retirement than you desire.

If you want to avoid this prospect, working with a professional can be invaluable. A financial planner can help you to manage your wealth in the most effective way to minimise the impact that the charges could have on your retirement.

Speaking to your planner can be a great way to gain a greater sense of confidence in your financial future if you’re concerned that you might go over your LTA. Alternatively, if you aren’t yet receiving professional advice, doing so can help you to build your long-term wealth without any concerns about running into tax issues down the line.

Retirement is traditionally seen as a time to relax and enjoy the rewards of a lifetime of hard work and that is why you shouldn’t have to settle for less than you deserve. Working with a financial planner can help you to avoid any potential problems and give you greater peace of mind.

Get in touch

If you want to know more about how working with a financial planner can help you save for retirement in a tax-efficient way, we can help. Please email enquiries@metiswealth.co.uk or call 0345 450 5670.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

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