Pensions ‘shouldn’t be a government piggy bank’ says Altmann
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The Government has borrowed £300billion, figures released by the Office for National Statistics (ONS) show, and now many are speculating about how Rishi Sunak will set out paying it back. One option which has been reported by The Telegraph is to reduce the Lifetime Allowance (LTA) for pension savings.
Kay Ingram, Director of Public Policy at LEBC Group, recently spoke exclusively to Express.co.uk about Mr Sunak’s steps to cover the cost of coronavirus pandemic, as well as potential actions which have been mooted.
“The Chancellor made a start in his March Budget, when many tax allowances, including the LTA [lifetime allowance], were frozen at their 2020 levels until 2026,” the chartered financial planner said.
“This means that with inflation boosting the value of pension funds, the tax which kicks in for pension entitlements over £1,073,100, will gradually drag
more pension savers into the extra tax charge.
“This is levied at 25 percent of the excess over the LTA, if the pension is drawn as income, which is then subject to income tax, or 55 percent, if it is taken as a lump sum.
“Not many people have paid this extra tax on their pension savings, and having a pot of over £1million may seem like a pipedream, but in addition to freezing the allowance for the next five years, the Treasury are now considering reducing it further to maybe £800,000 to £900,000.
“If this happens more people may face an additional tax charge.”
So, what could this mean for a person’s pension funds? The exact impact will depend on the size of pension pot a person has, but Ms Ingram gave an example.
“To put this in context, pensions in defined benefit or final salary schemes (mostly in the public sector) could provide a pension of over £53,000 per year before the current lifetime allowance is exceeded,” she said.
“If it were to drop to £800,000, this would mean an annual pension over £40,000 in payment would trigger the additional tax charge.
“These pensions usually include regular increases to the income and a dependant’s pension, the exact terms and eligibility for which are defined in the scheme rules.
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“There is usually no option to leave a lump sum on death, unless the member dies soon after the pension starts, when a lump sum payment may be due.
“Some of the pension can be exchanged for a lump sum at outset which is tax free.
“Most people these days are not in defined benefit pensions, particularly in the private sector, where it is more usual to have a pension pot dependent on investment growth.
“A pot size over £1,073,100 means paying some extra tax once more than the LTA has been drawn out, reaching age 75, or dying before age 75, if leaving a fund plus the withdrawals already taken above the LTA.”
The chartered financial planner went on to discuss what happens at the age of 75.
“After age 75, the LTA is no longer applied, and any remaining pension fund can grow unaffected by this extra tax charge, but still subject to Income Tax on any withdrawals made.
“Pension pots can usually be passed on after death outside of the estate for inheritance tax purposes. If death occurs before age 75, the inheritor of the pension may also withdraw income from it tax free.
“Where death is after age 75 any withdrawals are taxable income. The inherited pension does not count towards the inheritor’s own lifetime allowance.
“A pot of £1,073,100 would currently buy a healthy 65-year-old a pension, guaranteed for life, of around £29,000 per year, to include a dependents pension half of this and regular increases to the income.
“If the LTA were reduced to £800,000 the guaranteed income on the same basis would fall to £21,619 per year.”
So, does Ms Ingram suggest sticking or twisting when it comes to pension savings?
“The Treasury is unlikely to announce any changes before the November Budget and due to the complexities of introducing such a change these may not take effect immediately,” she suggested.
“When the LTA has been reduced before there has always been a protection put in place for those who already have larger funds, to avoid any change being fully retrospective.
“Those whose pension funds are near the current LTA of £1,073,100 should consider that the LTA tax charge will not apply until the cumulative
amount withdrawn is more than the allowance, or they reach age 75, or die before then.
“If these events are likely to occur in the distant future, continuing to make pension savings, with the benefit of tax relief at the marginal rate of income tax paid by the saver, is likely to be a sensible policy.
“Ceasing pension savings too soon, especially if this means giving up employer funded savings is not necessarily the best option.”
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