In this guide, we’ll delve into different strategies to maximise your Lifetime Allowance tax efficiently, and minimise the effects that the charge can have on your pension.
Whether you’re near your LTA limit, or already in excess, the next steps you take should be based on both your current situation and future plans. So, let’s take a closer look at how to make the most of your pensions and avoid any unwanted tax surprises.
STRATEGY 1: Drawing Tax Free Cash
A simple tip to reduce the impact of the Lifetime Allowance charge on your pension is by taking advantage of the tax-free cash allowance. You can withdraw up to 25% of your Pension Lifetime Allowance tax-free.
Not only does this allow you to access some of your pension savings without paying any tax, but it also helps you miss out any unnecessary additional Lifetime Allowance charges that may apply if you leave the tax-free cash within your pension.
Once you’ve taken out your tax-free cash, you can also consider investing it in tax-efficient wrappers like ISAs or General Investment Accounts. However, it’s important to note that taking the tax-free cash may increase the value of your estate for Inheritance Tax purposes.
SPEAK TO AN Adviser
STRATEGY 2: Minimise the Lifetime Allowance Excess Charge
Another strategy Higher and additional rate taxpayers can use to maximise their Lifetime Allowance is by phasing withdrawals over tax years. This strategy can result in lower tax charges on withdrawals. Let’s see how it works in practice.
Meet John, a tech company employee who earns £75,000 per year and receives a £25,000 bonus. He can choose to receive the bonus personally or have it paid directly into his pension by his employer. John has already exceeded his Lifetime Allowance, taken his full entitlement of tax-free cash, and has no immediate need for the funds.
If received personally – John pays a 42% tax charge (40% income tax + 2% National Insurance), leaving him with £14,500.
If paid to his pension – John’s pension receives the contribution without any immediate tax liability and no personal tax relief. John decides to wait until after retirement to access the funds.
Once retired, John chooses to draw the funds in a tax year when he has no other income. He designates the funds for drawdown and pays an initial 25% charge of £6,250. He then withdraws the remaining £18,750. The first £12,570 is within his personal allowance (based on current allowances), and the £6,180 in excess is taxed at 20%, resulting in a net payment of £17,514.
This strategy results in a net tax charge of 30%, 12% lower than if John received the funds personally.
Note: If John’s total earnings were between £100,000 and £125,140 in the tax year he received the bonus, he would face a 60% income tax charge. This means that making pension contributions may be even more advantageous. Additionally, if John’s taxable estate is over the available Nil Rate Bands, inheritance tax may be due at 40% of the excess.
STRATEGY 3: PROTECTING AGAINST THE SECOND LIFETIME ALLOWANCE TEST
If worried that your pension funds are affected by the Lifetime Allowance charge at age 75, then we offer this solution. Withdrawing the crystallised gains from the pension as you approach 75 can help reduce or even eliminate this charge.
The key is to make sure that the value of your crystallised funds at age 75 is equal to or less than its starting value. This can be a complicated area, so it’s important to get professional financial advice from a qualified adviser to ensure that you are making the right choice for your individual circumstances.
We hope these strategies are of help to you in managing the Lifetime Allowance. If you have any questions, please do get in touch with us.
speak to an adviser
We’d love to hear from you and by contacting Philip Crinion and Anna Warren at the link below you can arrange a consultation with us.
By using Bentley Reid you can be confident you will receive:
✔️ A free one hour initial consultation.
✔️ A tax expert with a minimum of 15 years’ experience in highly complex personal tax planning.
✔️ Tax planning opportunities, such as using the remittance basis of taxation or structuring overseas assets.
✔️ Expert advice delivered in a clear and concise way that is easy for you to understand.
✔️ Manage potential liabilities by receiving advice on tax planning opportunities, including Inheritance Tax, moving to the UK/Australia.
✔️ We look to provide upfront fee quotes so that you have a clear idea of any costs from the outset.
✔️ Peace of mind that a professional is guiding you through the process and ensuring compliance with tax requirements.
✔️ An accurate and clear assessment of all considerations in your global financial situation.
Lifetime Allowance Guides
Read our guides below and if we can help in anyway or if you want to learn more about anything please get in touch