How will changes to the Lifetime Allowance affect you?

Monday 14 August, 2023

If you are due to retire soon it is important to get retirement advice now. Ensure you understand your retirement options and how changes to the Lifetime Allowance affect you.  

To arrange an initial consultation complete our booking form or contact a Lonsdale financial adviser for independent financial advice on 01727 845500.

How much tax will I pay when I start to take my pension?

When you start to take income from your pension you may have to pay tax.  At age 55 years old (rising to 57 from 2028) you can take 25% of your pension without paying tax up to a maximum of £268,275.  Any other withdrawals you make from your pension will be taxed in the same way as normal income as HMRC will add them to any other income you have for tax purposes.  This may mean you move into a higher tax bracket.

What is the Lifetime Allowance?

The Lifetime Allowance charge was abolished from 6^th April 2023, but the Lifetime allowance will remain in force during the 2023/24 tax year.  If you are due to retire this tax year and start taking your pension, we recommend you get pension advice now or read more about pension planning. 

Abolishing the Lifetime Allowance completely will only happen after a future Finance Bill - so changes will only become law from April 2024. However, no tax will be charged on breaches to the current Lifetime Allowance from 6 April 2023.

How does the Lifetime Allowance work?

The Lifetime Allowance applies to the total value of all personal and workplace pension schemes (both defined benefit and defined contribution) owned by an individual.  It doesn’t include overseas pensions or state pensions.  It allows you to save £1,073,100 into your pensions over your lifetime, without facing extra charges.  Before 6 April 2023 any pension savings you accessed above this figure would have been taxed at 55% if taken as a lump sum, or 25% if used to provide income. If you had already used all your lifetime allowance by taking £268,275 in tax-free cash or equivalent, any further lump sums would be taxed at 55%. So, if you took a further £200,000 lump sum, you would pay 55% tax, i.e. £110,000.’

Conor McClean, independent financial adviser in St Albans, Hertfordshire said:

‘Abolishing the Lifetime Allowance will come as a great relief for anyone with a pension pot valued at over £1,073,100.  Even if you are not affected by changes to the Lifetime Allowance, if you are due to retire soon you may still benefit from taking financial advice before you retire.  You need to be confident that you have enough money to retire on, and our financial advisers can assist you by doing cashflow planning for you. Other questions you need to consider are: Do you have enough savings, how are you going to access retirement income, and if you have more than one pension pot how will you access your pension income tax efficiently?’

What to consider when you are close to retiring?

Conor McClean, independent financial adviser in St Albans, Hertfordshire continued:

‘Using cashflow planning helps our customers check if retirement is affordable, as our projections review your spending patterns, your assets and consider inflation and how it will affect your retirement planning.  Retirement income includes both secure income such as defined benefit pension schemes, pension annuities and the state pension scheme.  Flexible income includes pension drawdown and the income from any capital and investments you own.  We discuss your choices at retirement which include, taking a 25% lump sum, exchanging your pension savings for an annuity provided by an insurance company which is guaranteed for the rest of your life (with options including a dependent’s annuity) or a temporary annuity.   There is also the option to take income as flexi-access drawdown, so you take it when you need it, and the remaining money remains invested.  You could take your cash as a lump sum, with 75% of the fund subject to income tax, or leave your pension pot until you need it.  You don’t have to draw savings from your defined contribution pension scheme and the fund can be passed down to a nominated beneficiary often outside your estate so it would be exempt from inheritance tax.  As retirement planning is complicated it is important that you make the right decisions to achieve your financial goals in retirement.  Contact your local Lonsdale Wealth Management financial advisor for pension advice or complete our booking consultation and we can guide you through your retirement planning options.

In Summary

Are you affected by changes to the Lifetime Allowance? If you are due to retire soon you may benefit from taking financial advice from a Lonsdale Wealth Management financial adviser. We offer an initial consultation so you can meet your financial adviser and determine whether it is worth paying for pension advice.

Please note:

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

For more information read:

Understanding investments - Hoping to retire within the next 5-10 years
How much is your state pension worth?
Lonsdale Services voted in the top 100 Financial Advisers in the UK
When should you pay for independent financial advice?
Lonsdale Services won Professional Adviser Award - Best Adviser Firm for Vulnerable Client Care

 

 

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