Investors can save more into pensions from 6 April 2018, when the lifetime allowance (LTA) increases from £1 million to £1.03 million.
The LTA is a critical part of pension planning. It is the total amount investors can have in pension savings at retirement, before additional tax charges apply.
This allowance has been reduced in recent years, but it will now start increasing in line with inflation each year.
A holistic approach
Investors need to be aware of the impact of the LTA on their total pension savings. This can include such assets as workplace pensions, so it’s important to get up-to-date valuations for your LTA calculations.
If it is possible you could breach the LTA, you may want to consider alternative retirement provision, which could include maximising your ISA allowances or looking at other investments. There are also different ‘protection’ options available, which effectively allow some savers to ‘lock-in’ higher pension allowances.
Defined benefit transfers
The LTA can be important when considering transfers out of defined benefit (DB) pensions. Transferring the benefits can sometimes lead to a breach of the LTA, especially with the high transfer values offered by many DB schemes.
To calculate the value of a DB pension, the accrued benefit is multiplied by 20. If you are due to receive a DB pension of £50,000 a year at your scheme’s retirement age, this is deemed to be worth £1 million for the purposes of the LTA. This is within the current LTA, but the transfer value may be much higher, and push your total pensions savings over the LTA.
The Financial Conduct Authority does not regulate tax advice. Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. Tax laws can change. Occupational pension schemes are regulated by The Pensions Regulator.
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