What is the limit on pension savings before paying tax?
I'm 56 and a senior manager with a good salary. I pay additional rate tax and have built up my pension fund over the years. At its last valuation, it was worth £880,000. I am a member of my employer’s scheme so it is continuing to build, but I am concerned that it might go beyond the limit for pension schemes, which I understand is more than £1 million. Do I have to stop contributing when I reach that figure?
Matthew Beck of Smith & Pinching responds:
The first thing I would need to understand before advising someone in your situation would be your retirement plans – when do you wish to stop working? What do you want life to look like? Are there any specific capital expenses to plan for? A pension is there to provide you with funds to live the retired life you want after all! With this starting point, we can then consider the technical planning.
The Lifetime Allowance (LTA) for pensions is the maximum you can hold in pension savings without triggering a tax charge. It currently stands at £1,073,100 and has been frozen for five years until April 2026. It is possible to have a pension fund worth more than the allowance, but you would be liable for a tax charge on the excess, payable at certain trigger points. These include when you start taking pension benefits over certain amounts, or at age 75 when there is an automatic test.
The rate of the LTA charge will depend on how you want to take the excess benefits. If taken as a lump sum, the charge is 55pc. If taken as income, the tax charge drops to 25pc (however income tax will also still be potentially due on top of this).
There is a real possibility that you may incur a future LTA charge – but the tax relief you are getting now as a higher rate taxpayer may outweigh that. There is a very careful balance to this question!
Other considerations are what other pensions you hold, especially if you have any with defined benefits, which will be important to plan around and will add to your total lifetime allowance position.
I would use cashflow modelling tools to project the likely growth of your fund over time and this would enable us to calculate your potential future LTA charge liability under different future contribution scenarios and the impact of this on your retirement planning. We could then explore what measures you might take to mitigate the charge.
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Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk