In our next guide on the pension Lifetime Allowance, we take a closer look at how your investment strategy can play a role in minimising the LTA charge. Keep in mind, there is no one-size-fits-all solution. However, by aligning your investment strategy with your LTA pension planning, you can aim for solid returns while managing tax.
Every individual’s situation, goals, risk tolerance and financial ability to withstand loss are unique. It’s important to seek personalised advice when determining the best investment strategy to complement your pension and Lifetime Allowance planning.
Funds within the lifetime allowance
For a secure retirement, you can use the funds within the LTA to invest in a diversified portfolio that protects against inflation and supports withdrawals. As a result, you can manage the balance between investment growth and withdrawals to reduce the possibility of a second LTA charge at 75.
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funds in excess of the lifetime allowance
If you have funds within the LTA that are generating sufficient income, then some funds in excess of the LTA could be used for other purposes e.g. inheritance planning.
Any funds in excess of the LTA will face a minimum tax charge of 25% at either age 75, on death or if specifically accessed. Given this reality, if the funds are not required to meet income needs and a 25% charge is unavoidable, it may make sense to maximise the pension value in excess of the LTA.
EXAMPLE STRATEGY
- Kate has a £1.5m SIPP with no LTA protection and needs £40,000 a year. Bentley Reid recommends that she:
- Draw her maximum tax-free cash (£268,275) and re-invest in tax efficient wrappers. Together with the remaining funds within her LTA, these more than meet her annual needs.
- Kate does not require the funds in excess of the LTA for income. As a result she can take a longer-term approach with this money.
| Holding | £ Investment | Investment Mandate |
| Funds Within LTA (including tax-free cash) | £1,073,100 | Bentley Reid £ Balanced |
| Funds in Excess of the LTA | £426,900 | Bentley Reid Global Growth |
| Total | £1,500,000 |
- The above chart is for illustrative purposes only. It should not be considered a recommendation to take any particular action.
- For funds within Kate’s LTA, the Bentley Reid £ Balanced mandate follows a conservative approach to achieve long-term real returns. This multi-asset, globally diversified fund targets steady growth, making it ideal for regular withdrawal needs.
- For funds that exceed the LTA, the Bentley Reid Global Growth mandate can be invested into. This will be invested to maximise returns over the long-run. However, Kate will also accept the inherent risk and volatility of a pure equity strategy.
- Note the value of investments can go down and well as up and that the past is no guide to future performance.
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If you would like to explore a suitable investment strategy in regards to managing your pension and LTA, then don’t hesitate to contact us for personalised financial advice.
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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