Rayden’s Spoof Blog

Peter Ginger

Peter Ginger

APFS MCSI TEP Chartered Wealth Manager November 2021

Do pensions work beyond the lifetime limit?

Proposed draft for blog on pensions with Rayden Solicitors 

Is it worth building your pension investments beyond the lifetime limit?

We heard a client ask “what was the point in accumulating pension investments beyond the lifetime allowance” and in this blog we set to explain the benefits.

In the current (tax year 2021-22) pension lifetime limit is £1,073,100 and we now know this limit has been frozen for the next 5 years under the last Budget – so what is the point?

April 6th 2006 saw dramatic changes in pension legislation, called “A-Day” among these changes a pension investment lifetime allowance of £1.5 million was introduced. Except for specific concessions, charges were made where that limit was exceeded. In the following tax years that limit was gradually increased to £1.8 million and the trajectory was expected to continue upwards. Suddenly, in 2016 the lifetime allowance was reduced to £1 million. It is now £1,073,100 and fixed at this level for the next 5 years!

So, to repeat the question, is it worth continuing to invest in your pension when you are close to or likely to exceed this limit? Let’s consider the following: -

  • If you have generated over £1 million in your pension pot you are probably a business owner or high earner and used to paying taxes
  • The tax charge for exceeding this limit is 25% if taken an income – or, from the other perspective, you still have 75% of the fund value. If all the excess taken as a lump sum the tax charge is 55% - ouch! But either way there is the opportunity to take 25% as tax-free cash
  • When the reduction to £1 million was announced in 2016 those not already enjoying concessions could have locked in higher pension values and these are still available
  • Good retirement planning advice consists of more than using just pensions - to avoid having too many eggs in that basket
  • Pensions are often the subject of legislation changes and no doubt will change again in the future – possibly less restrictive!
  • When pension limits come down it is easy to lose sight of the significant tax reductions already secured in the pension pot through income tax, corporation tax, capital gains tax and, in many cases, inheritance tax reliefs
  • Although both an advantage and disadvantage – depending on which side of the divorce settlement you are on - allowances against the lifetime allowance are available in pension sharing and transfers
  • The calculation of tax charges is triggered by specified events – called “benefit crystallisation events” (BCE’s) and there is long list of them – good financial planning understand how to manage these events and reduce the tax impact

The point I am making is that, although the lifetime allowance might at first seem restrictive, you should not automatically conclude that making pension contributions above the lifetime allowance is simply not worth it.

We look at the annual pension allowance and the charges around that in our next blog

Would like more clarification? Then email me at peterginger@mdgifa.com

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