Are you approaching or over the Lifetime Allowance limit and considering stopping pension contributions? Here are a few simple tax planning tips to keep in mind.
As the frozen lifetime allowance continues, it’s a common question whether to continue pension contributions. While it’s understandable to consider halting contributions, there are other factors to consider, such as ongoing employer contributions through a workplace pension scheme.
Every individual’s situation is unique and there is no straightforward answer. However, before making a decision, it’s crucial to consider certain key themes that apply to many.
MAXIMISE YOUR WORKPLACE PENSION BENEFITS
If you’re a member of a workplace pension scheme and receiving employer contributions, it’s worth exploring if your company can be more flexible. Ask if they can stop contributing to your pension and increase your salary by the same gross amount instead. Keep in mind, this could result in a higher tax rate.
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REDUCE YOUR TAX LIABILITIES
Or you can go in the other direction. Consider diverting some of your salary to your Pension. If you’re paying higher tax rates on your salary, there’s an opportunity to lower your tax burden by directing a portion of your gross salary to your pension.
This could potentially reduce both your Income Tax and National Insurance liabilities, even if your pension fund exceeds the LTA. However, it’s important to note that this depends on your personal circumstances.
PENSION CONTRIBUTIONS AND NEED FOR ACCESS
Making a pension contribution can be a wise decision, but it’s important to remember that the funds can only be accessed starting at age 55 (57 from 2028). If you’re under that age and have immediate cash needs, think about keeping the funds in your personal name instead. You can still invest tax-efficiently, for example by using your annual ISA allowance.
SMART PENSION PLANNING FOR BUSINESS OWNERS
Even if the pension value surpasses the LTA, business owners can still benefit by making pension payments from their company. This can lower the corporation tax bill and diversify their overall asset spread by investing in a wide range of options.
INHERITANCE TAX (IHT) PLANNING
Individuals need to be mindful of Inheritance Tax (IHT) on funds they own directly. After reliefs, such as the Nil Rate Band and Residential Nil Rate Band, these funds may be subject to IHT and the estate could pay 40% on the taxable portion.
However, pension funds that fall below the LTA are typically exempt from IHT. And if the pension value exceeds the LTA at death, a 25% levy automatically applies. Depending on the individual’s IHT position, this may be a more favorable outcome than if the funds were held within the estate.
TAX EFFICIENT INVESTMENTS BEYOND PENSIONS
If your pension value goes beyond the LTA, you have options for tax-efficient investing outside of pensions. One option is Venture Capital Trusts (VCTs), which offer a 30% tax relief on the initial investment after being held for five years.
However, these investments tend to be more risky and volatile than traditional multi-asset funds, so it’s important to speak with a wealth manager before making a decision. Make sure this type of investment is a good fit for your personal situation.
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Lifetime Allowance Guides
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