Lifetime Allowance Charge

Lifetime allowance - download graphicLifetime Allowance Charge

Although it is possible to accrue benefits of any size in a UK registered pension scheme, the lifetime allowance (LTA) caps the benefits that can be taken without a tax charge (the LTA tax charge). ‘Download free guide now’

The LTA is currently £1,030,000 in 2018. The LTA tax charge only applies when ‘Benefit Crystallisation Events’ (BCE) occur. There are currently 13 triggers to a BCE. However the most common are when a person buys an annuity, draws a tax free lump sum, puts their pension fund into “drawdown” or reaches age 75.

Dodging the bullet…until age 75

There’s no requirement to ever draw your pension benefits. However, they will be measured against the LTA when you turn age 75. Therefore, it is not possible to completely avoid an LTA test just by deferring your pension benefits! You do not need to draw all your pension benefits in one go. Instead, you can part crystallise a pension and delay the LTA tax charge until a further BCE occurs. Thus aiding the overall investment growth potential, as the funds would remain untaxed in the pension. (Download free guide now)

So how much will need to be paid?

When a BCE occurs that does incur an LTA tax charge, you have two options: Lump Sum You can take the excess as a lump sum and pay a one-off 55% tax charge. Income You can leave the excess within the pension and pay a one-off 25% tax charge. Any withdrawals will be charged at your highest marginal rate of tax. Deciding which option best suits you depends on whether you plan to leave the pension as an inheritance, or plan to draw on the funds in the future. It is possible to plan for this event and draw down any investment growth each year in order to pay tax at your highest marginal rate rather than incur the 55% tax charge at 75. However, this should be considered as part of a wider income strategy long before the event occurs. (Download free guide now)

Managing the lifetime allowance and your pension’s exposure to tax takes an in-depth knowledge of legislation and tax rules both in regards to pensions and income. So get in touch and see if we can help.

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