£700,000 in your pension? The lifetime allowance could lead to you being taxed at 55%

Share this article:

£700,000 in your pension? The lifetime allowance could lead to you being taxed at 55%

6 July 2021

Share this article:

Please fill in your details to arrange a financial review with one of our financial planning or investment experts.

How it works:

  • We will call you back to find out more about your aims and requirements
  • We will arrange a meeting with one of our team at a convenient time, either over the phone, on video, at your home or workplace, or at one of our offices
  • You will be able to ask any questions you have and find out more about managing your wealth with Saltus
  • Your review will be at our cost and there is no obligation to work with us afterwards

Who we work with:

  • Individuals with £250,000 or more in investable assets
  • High earners with £100,000 or more to invest and able to reach £250,000 within five years
Please fill in your details to arrange a discussion with one of our financial planning or investment experts.
Firstname is required
Surname is required
Please enter a valid email address
Phone number is required
Postcode is required

Portfolio size *

We will treat your personal information with respect. By submitting this form, you understand that we will process your information in accordance with our privacy policy, and that you may receive ongoing insights from Saltus by email, phone or post.

If your pension pot is becoming a sizeable asset, it might not be long until you could be taxed at a painstaking 55%. The lifetime allowance or ‘LTA’ is essentially a cap on the size of your pension. The current limit is £1,073,100. Go over this and your money could suffer significant tax penalties. This amount includes any contributions you make to your pension, as well as the growth of your fund, and is applied across both defined benefit schemes and more typical defined contribution pensions.

Fortunately, the tax penalties will only apply when you come to take the money out, however, they are pretty steep. This complicates further at age 75 but that’s for another article.

What are the lifetime allowance tax charges?

If you take any income over the LTA as a lump sum, it will be taxed at an eye-watering 55%. If, instead, you take it as a regular income that could soften the blow slightly as it will be taxed at 25%. Although, that will be on top of your marginal rate so it’s still a minimum of 45% and could even cost you 65% if you’re a higher rate taxpayer. Ouch!

Meet your financial needs and objectives…

Speak to an expert

How could this impact me?

I can already hear you thinking “I don’t need to worry about that? A million pounds is a long way off!” Well, maybe it’s time to re-consider…

If you have £700,000 in your pension and it grew at around 5% a year, even if you completely stopped contributing, your pot would be over the million-pound mark in just over seven years – not that long at all. If you were also contributing £1,000 a month, you’ll have in excess of a million pounds in just six years – the lifetime allowance can creep up on you pretty quickly.

How can I prevent myself from being taxed at 55%

It’s important not to be complacent. If you don’t want the LTA to affect you, you have to plan ahead. Ultimately, depending on your objectives, there may come a point when it’s sensible to stop contributing to your pension and make use of some of the other tax wrappers available to you.

I must stress that stopping contributing to your pension certainly does not mean halting investing and saving entirely, which is another mistake people commonly make. It just means shifting your strategy slightly. Other suitable strategies could include taking your tax-free cash earlier than planned to ensure the growth on this doesn’t take you closer to the lifetime allowance, and you could consider how to use anything over the LTA for generational planning.

Generally, the lifetime allowance can become extremely complicated, particularly once you start taking income or if you have multiple schemes of different types. If you have pensions assets nearing £700,000 in value, you really should be working with a financial adviser.

So, if you have a decent pension pot and don’t want to end up being taxed as much as 65% take some advice and plan ahead!

Watch our webinar

The Lifetime allowance – could it affect you
09 March 2021

In conversation with Jack Munday and Jordan Gillies

Jack Munday
Jordan Gillies

Arrange a financial review...

Book a review

Saltus Financial Planning Ltd is authorised and regulated by the financial conduct authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested.

Why Saltus?

Find out more about our award-winning wealth management services…

Finalist

Financial Advisory Firm of the Year

Finalist

Client Relationships Award

Winner

Financial Services, Banking and Insurance Firm of the Year

Finalist

Investment Performance Cautious Portfolios

£2.2bn+

assets under management

18

years working with clients

30+

advisers and investment managers

120+

employees

Discover more

Financial planning

Financial planning can help you reach your goals in life, whether you want to determine when you can retire comfortably, bring organisation to your financial world or pass on your wealth effectively.

Pensions and retirement planning

Deciding when to retire is a challenging decision and can feel like a leap of faith. At Saltus, we gather information on all of your existing assets and then use our technology and expertise to show you exactly how to achieve the retirement you’re after.

Reducing your tax burden

How to structure your wealth and access income should be approached in a sophisticated way. A detailed financial plan may use pensions, ISAs, general investment accounts, offshore bonds and other tax wrappers to ensure you can draw your money in a tax-efficient manner.

Consolidating your wealth

Holding multiple investment accounts and pensions can mean they’re hard to keep track of and administer. We’ll help you overcome this by consolidating your accounts into a single plan so that you can understand your financial position with ease.

Protecting you and your assets

We protect our cars and houses without much thought yet you might be the most valuable asset in your family. Whatever your situation, we can provide advice to ensure you have the right level of insurance in place to keep your finances protected.

Passing on your wealth

Estate planning is more important than just having a Will. We’ll work closely with you to understand how estate planning, which has emotional as well as financial consequences, can impact your overall financial plan.

Significant life events

Significant life events can present great opportunities but also considerable challenges. Whether you are going through a business sale, divorce or are receiving a lump sum, we’ll help build a financial plan to meet your changing lifestyle.

Related blog posts

Get in touch with Saltus…