New lifetime allowance could hit more than just ‘pension millionaires’
The latest figures surrounding the pensions lifetime allowance (LTA), which governs how much your pensions can be worth whilst still claiming tax relief, suggest that a considerable number of middle-income earners are being hit by the lower threshold. The amount collected from pensions exceeding the LTA by HMRC during the 2015-16 tax year came to £126 million, close to two thirds more than in the previous year. The number of pensions breaching the LTA limit also went up from 1,482 to 1,539 this year. The LTA was set at £1.8 million in 2011-12, but has since decreased over subsequent years to the current £1 million threshold. This means that exceeding the LTA is increasingly becoming an issue not just faced by those considered to be ‘super wealthy’.
The current LTA level allows an income of around £45,000 for those retiring at 65. A general rule of thumb can be to aim for an income in retirement of around two thirds of that you are earning when you finish work, so a £45,000 pension income would be sufficient for someone who was earning around £68,000. Whilst this figure is somewhat higher than the current average UK salary, it’s also not a figure which is the reserve purely of the elite, penalising those on middle incomes.
Those with higher percentage returns on their savings are also likely to breach the LTA earlier. This means that the current limit comes down hard not only on the wealthy, but also on those who have made wise pension investments in order to enjoy a better return on their savings. As such, the potential charges for breaching the LTA may lead to those approaching the point at which they want to retire needing to stay in work longer due to the constraints on their retirement income.
If you have any questions about the potential impact of the LTA on your own retirement income, please feel free to get in touch with us directly.