Large pension funds need to consider the Lifetime Allowance, that is the total value you can accumulate in pensions before incurring additional tax penalties. The Lifetime Allowance (LA) was introduced in 2006/7 at £1.5M, the LA figure has changed over the years and it was reduced to £1M in 2016/17. However, for future tax years this will be increased inflation (CPI), so for 2017/18 the LA is £1,030,000.
How is the charge triggered?
LUMP SUMS
Normally you can take 25% of your overall pension as a tax free lump sum, however that is providing you don’t exceed 25% of the LA. Any lump sum you take over this amount will be taxed at 55%.
Despite this, it may still be advantageous for you to take monies as a lump sum and suffer this tax penalty, if you are an additional rate tax payer.
INCOME
If your accumulated pension funds are in excess of the LA, then you will have a 25% tax charge taken from any withdrawals before any monies are taxed at your marginal rate. Let me explain, if you want an income of £60,000, then you would need to request a payment of £80,000. Then the reduced £60,000 would be taxed at whatever tax your personal tax bands dictate.
TAX MITIGATION
You could consider investing some monies into EIS or VCT’s, as this would enable you to claim 30% of tax rebate for any amounts you invest. That will offset some of the tax you pay.
ASSET ALLOCATION
I understand that many adviser’s infer that you should not change the way you invest your pension when your accumulated pension is approaching or goes beyond the level of LA. I wonder if that is a sensible course of action.
It’s our belief that anyone considering taking withdrawals from their pension should radically change the way in which they invest their funds and move to an investment asset allocation that is sustainable, that means that you should re-appraise all of your fund choices to ensure that the choices support your election to withdraw funds on a regular basis, you should also consider aligning your choices help to safeguard against inflation.
If you do have a large pension fund and arrange your choice of funds correctly , you and your adviser will have created an (almost) perfect money machine that will not run out of money.
If this is what you would like to find out more about, why not get in get in touch either by use of our contact tab or telephoning Ruth on 01189 347 920.
