Saving into your pension? Beware the lifetime allowance tax traps

In News by Wealth of Advice

SAVING INTO YOUR PENSION? BEWARE THE LIFETIME ALLOWANCE TAX TRAPS

WITHOUT ASTUTE PLANNING, YOU COULD GET CAUGHT IN THE INLAND REVENUE’S NET

1ST OCTOBER 2017

Setting money aside to place into your pension pot may make financial sense – but it is also possible to save too much, incurring tax penalties in the process.

On one hand, the government has been proactively encouraging the next generation to save into their pension, building up a comfortable nest egg to fund their retirement. On the other, however, they have been reducing the lifetime allowance every two to three years.

Five years ago, savers could accrue up to £1.5m in their pots without having to pay for the privilege. Since then, the allowance has dropped twice – to £1.25m in 2014, and by a further £250,000 last year.

Any funds above the threshold will not qualify for pension tax relief, but that’s not all. Should that money be taken as income, it will be taxed at 25%; if drawn as a lump sum, the government will take over half of it – 55%, to be precise.

With these punitive charges only hitting those with seven-figure pension pots, many erroneously believe that it only affects those in the uppermost income bracket. However, according to Salisbury House Wealth’s Tim Holmes, it is catching out more than just the wealthiest in society.

“An increasing number of taxpayers who have done the responsible thing and saved for retirement are being caught out by this super tax trap,” Holmes told FT. “Many of these individuals are not particularly high earners.”

Despite sounding like a significant amount of money, £1 million pounds may not stretch as far as one might think.

Financial pundits have previously suggested that a person who saved the maximum amount every year could expect to receive approximately £21,000 a year in retirement – a relatively modest figure, based on the low allowances and similarly low annuity rates.

The LTA could even be slashed further in the coming months. With no imminent changes on the horizon with regards to pension tax relief, the lifetime allowance could be trimmed yet again. It has, after all, brought around £390m into the Treasury’s coffers.

The best way to counteract these potential tax traps is to take meticulous care with your pension planning.

Wealth of Advice offers independent, impartial advice, tailored to your particular situation and retirement goals. Talk to us today and get your first consultation on us.

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