The lifetime allowance – the maximum amount you can save in your pension over your lifetime – is currently £1.03 million after rising by £30,000 in April 2018. This sounds like a lot of money, but it can easily be breached without realising. Here are a few of the most common ways that this happens.
Defined benefit (or final salary) pensions are notoriously difficult to measure against the allowance and can catch people out because the calculation is quite complex.
The simple method is to multiply the annual income you are set to receive in retirement by 20 and then add your maximum tax-free cash entitlement. The final number, if above £1.03 million, will mean you may have tax to pay.
Most people change jobs many times across their lifetime and can accumulate a number of pensions. It can be difficult to keep track of multiple pensions. You regularly need to review up-to-date valuations and watch how your investments are performing, which is often time-consuming, tedious and sometimes complicated.
Though it seems unfair, you could be penalised with a tax charge if your investment growth takes you over the lifetime allowance. However, nobody can predict exactly how well their investments will perform in the future – and therefore when they should stop making contributions.
A financial planner can help you consider consolidating your pensions*, assess your final salary pensions against the lifetime allowance and forecast your future investment growth so you know how much you could contribute without risking a surprise tax bill. We can also help you to protect your pension from the lifetime allowance tax charge up to £1.25 million.
If you think you might be at risk of breaching the allowance in the future or you just want to know more, why not book a free pension consultation with one of our experts? Call us on 020 7189 9999, email firstname.lastname@example.org or fill out this form.
*Before you consider transferring a pension, it is important to ask yourself: Will I lose any valuable benefits or features from my existing pension plan? Will I incur any penalties on my existing pension if I transfer? Is it an occupational final salary pension scheme? (in which case it is very unlikely to be advisable to transfer) Have I considered the charges on my current plan? (a new arrangement may be more expensive – especially if you have a stakeholder pension).