Contributing if over the Lifetime Allowance

GUIDE 4 OF 6

Given the freeze in the level of the LTA, we are increasingly being asked: “Should I cease pension contributions or continue to make further additional contributions, taking into account that I am approaching or over the LTA?”.

Although a saver might consider stopping contributions as their pension value approaches the LTA limit, there are other considerations. For example, they may still be a member of their workplace pension scheme, receiving valuable employer pension contributions.

There is not a one-size-fits-all answer and it depends on an individual’s specific situation and needs. However, there are some recurring themes that are important to consider before making a decision.

WORKPLACE PENSION SCHEMES

If you are still a member of a workplace pension scheme and receiving employer contributions, you could check if your company would stop making contributions into your pension and instead ‘top up’ your salary by the same gross amount.  Note, this may increase the rate of tax payable.

pERSONAL TAXATION ON WITHDRAWAL

Conversely, if you are paying higher rates of tax on your salary, there may be an opportunity to divert some of your gross salary to your pension, reducing your Income Tax and National Insurance liabilities.

In certain circumstances, this could reduce your tax burden, even if your pension fund value exceeds the LTA. As with all pension planning, this is very much dependent on your personal situation.

Need for Access

If you wish to make a pension contribution, you should be aware that the funds can only be accessed from age 55, rising to age 57 from 2028. If you are under that age and have any short-term liquidity needs, you should consider whether it makes more sense to retain the funds in your personal name. You can still invest tax efficiently, e.g. by using your annual ISA allowance.

CORPORATE PENSION CONTRIBUTIONS

Even if their pension value exceeds the LTA, some business owners may still elect to make pension payments from their company. Contributions can reduce the overall corporation tax bill and the pension fund can be allocated to a wide range of investments, diversifying the business owners overall asset spread.

INHERITANCE TAX (IHT)

Any funds owned directly by an individual may be liable to Inheritance Tax (IHT), after reliefs such as the Nil Rate Band and Residential Nil Rate Band. If there is a liability to IHT, the individual’s estate will likely pay 40% on the taxable element.

In contrast, funds that are held within a pension and that are below the LTA are usually outside of the estate for IHT purposes. Any pension value that exceeds the LTA at death is automatically subject to a 25% levy. Based on the individual’s IHT position, this may be more favourable than the IHT treatment of funds within their estate.

Other Tax Efficient Investments

If your pension value exceeds the LTA, you can explore other tax efficient investments outside of pension arrangements, such as Venture Capital Trusts (VCTs). If held for five years, qualifying VCT funds attract tax relief of 30% of the initial investment, potentially reducing the investors overall income tax bill.

However, these investments are usually more volatile and higher risk than traditional multi-asset funds and it is strongly recommended that you should speak to a wealth manager to see if this form of investment is suitable for you.

SPEAK TO AN Adviser

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