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14 Jan 22
What is the Lifetime Allowance and What High Earners need to know
The lifetime allowance is the maximum amount of pension savings you can accumulate without a charge being applied when you decide to retire, writes David Oversby; Chartered Financial Planner and Senior Associate Director at True Bearing. When first introduced, the limit was £1,500,000 and this has now much reduced to £1,073,100 in the 2021/22 tax year.
Although £1,073,100 may seem unattainable to many, a 30yr old with a current pension of £170,000 achieving a net growth rate of 5%pa would breach the current lifetime allowance by age 67 without investing another penny!
The reduction in the lifetime allowance has particularly affected higher earning members of the NHS such as GPs and hospital consultants. A British Medical Association (BMA) study in 2019 of 6170 GP and hospital doctors revealed that 31% had reduced their hours due solely to pension tax charges and 57% were considering retiring early for the same reason. Earlier this year the BMA called for a meeting with Rishi Sunak and then health secretary Matt Hancock amid fears that a freeze on the lifetime allowance would have a grave impact on the medical workforce.
So, if your GP is retiring early then you can probably blame the Lifetime Allowance!
How you can get to grips with the Lifetime Allowance
If you’re at risk of being affected by the Lifetime Allowance, your IFA can help you plan for the future and minimise the potential liability. The tax rules surrounding pensions are complex, a tax bill is never good news but an unexpected one is worse. With help from your adviser, look at your current benefits, look at the income needs you have for retirement and formulate a plan that gives you peace of mind.
One way is to take full advantage of your tax-free cash allowance; some final salary schemes allow you to take more tax-free cash by reducing your annual pension.
Another is to retire early; many final salary schemes will offer a lower level of income if you retire before the scheme’s normal retirement age. This may reduce the overall value of your pension benefits below the lifetime allowance and therefore avoid the tax charge. For defined contribution schemes the fund value will be lower due to less contributions being received again potentially reducing the fund value below the lifetime allowance figure. More time for golf, travel and dining out with friends!
Spend it! Alternatively, just forget the tax and enjoy yourself. Chances are you started saving into a pension all those years ago to live the life you wanted to in retirement. There are only so many tomorrows so start spending and living today!