The UK Government has been promoting private pensions as a way for you to save for retirement. It also helps reduce dependence on state provisions. However, private pensions are subject to taxation and the Lifetime Allowance (LTA) has remained frozen since April 2021. The LTA is a limit on the amount of pension savings you can have without incurring an additional tax charge. The current LTA is set at £1,073,100.
Understanding the charge and taxation related to the LTA can be complicated, so keep reading to learn more.
The chart overleaf compares the MSCI World Equity Index (A) against UK inflation (B) while the LTA increased with inflation (2018/19 – 2020/21). There has been significant equity outperformance over this period. The LTA uplift, while welcome, has only provided a small level of protection. Meanwhile, increasing number of savers are seeing their pension values exceed the LTA.
The Inflation rate in those years was 3% in 2018/19, 2.4% in 2019/20 and 1.7% in 2020/21. From the 2021/22 tax year, the LTA was frozen. Even if indexation offers only partial protection, with the Bank of England forecasting UK inflation of 10% by the years end, the four-year freeze on the LTA will see a material decline in the real (inflation adjusted) value of the pension limit. As a result, more and more pension funds could be subject to the LTA charge.
speak to an adviser
The above serves as a reminder that this is a highly technical area and you should seek out experienced, professional guidance. Bentley Reid can work with you to understand your position in relation to the above, so please do get in touch.
By contacting us at the link below you’ll receive:
✔️ A Free initial consultation with a Bentley Reid tax expert.
✔️ An accurate and clear assessment of all considerations in your global financial situation.
✔️ Tax planning opportunities, such as using the remittance basis of taxation or structuring overseas assets.
✔️ Manage potential tax liabilities, including providing Inheritance Tax advice.
✔️ Peace of mind that a professional is guiding you through the process and ensuring compliance with tax requirements.