Here we are at the third and final part of our Stealth Tax Series. We have covered off the implications of stealth tax on estate planning / inheritance tax and on income, but we will spend this week looking at how you might be impacted with regards to your pensions and retirement planning.
Pensions are incredibly tax efficient vehicles, but there are limits as to how much can be saved in a pension and once these limits are breached, it can result in a tax charge. Let’s look at this in more detail…
The Rapid Descent and stagnation of Pension Allowances
Let’s take ourselves back to 6th April 2010, a notable date in pension world – this was the last time there was an increase in the Annual Allowance and when the Lifetime Allowance was at its peak, the limits being £255,000 and £1.8mn respectively. They are now £40,000 and £1,073,100 – quite a contrast.
Since 2010, both allowances have fallen considerably and have become very lucrative for the treasury. The Annual Allowance has been frozen since 2014 and although you can “carry forward” unused allowance, you do not get tax relief on any contributions above your relevant earnings for that tax year. The Annual Allowance is less of a concern from a tax point of view as it is based on contributions and is relatively clear on what you can do.
A larger concern is the freeze of the Lifetime Allowance (LTA), which is much harder to control and keep within the limits. At its lowest, the LTA was £1mn, but the idea was to increase this by the Consumer Price Index (CPI), which is why it now sits at £1,073,100. However, when the Chancellor announced that this limit would be frozen, many pension savers found themselves in a difficult position where their pension pot could result in a tax bill.
The difficulty with the LTA is that the value of a pension pot is determined by several factors, not just the amount invested. For example, when stocks are performing well, it is not unusual to see pension pots growing substantially. The tax implications of breaching the LTA can be as high as 55% if taken as a lump sum. In the decade of 2010 to 2020, the number of individuals breaching the allowance has increased by over 1000%.
It is important to continually monitor your pension position and ensure that whilst you are making the most of the tax efficiency of a pension, to ensure that it is not going to leave any issues further down the line when it comes to accessing the monies.
Are you likely to be caught out by stealth tax?
Thank you for reading our Stealth Tax Series blog and hope you have found it useful. At Alexander Grace, we want to help people to understand their financial position and put them in a better place. Your money matters to you and therefore it matters to us to ensure you make the most of it. With much of the events of the world today, stealth tax isn’t particularly forthcoming, and it can become increasingly difficult to monitor your own position. As Independent Financial Planners, we can help you to build a tax efficient strategy, helping to preserve and grow your money in line with those important financial objectives for you and your family.
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