The mind boggling complexity of Pension Allowances

Pension Annual Allowance

“The mind boggling complexity of Pension Annual Allowance contribution rules and Pension Lifetime Allowance tax charges has again been in the news with suggestions that medical professionals are reducing their hours on an “unprecedented scale”, on the grounds that the unfairness of the tax system results, in some cases, in penal tax charges

This Radio 4 Money Box podcast GPs and the NHS Pension scheme (starting 13:25 mins) discusses the issue, but the truth and reality may lie somewhere in the middle, yes, some punitive tax charges at the margins, but, for many medical professionals the end result (even after tax charges) is still a far better pension scheme than if they were purely self-funding via a personal pension.

There are numerous headlines offering overly simplistic guidance on how to avoid or reduce the Lifetime Allowance, and we’ve previously looked at this problem , but there still remain some valid reasons why you may be financially better served contributing to your pension and exceeding this Lifetime Allowance.

4 reasons why you might choose to exceed Lifetime Allowance

  1. If you are concerned about the Lifetime Allowance and your employer contributes to your pension, it may be tempting to stop those contributions to potentially avoid a future tax trap. However, in our experience, not all employers will offer an equivalent uplift in salary or other benefits that will provide an equal compensation, even after allowing for an element of tax charge.
  2. If you can still receive 40% or 45% Income tax relief on any contributions and your total pension has the potential to be inherited and used by family and future generations, the 25% lifetime allowance tax charge that the pension fund might suffer could still be a better overall planning option than not contributing and then your estate suffering Inheritance Tax at 40%. If a Lifetime Allowance tax charge was levied at age 75, all growth in the pension fund thereafter would not be tested again against the Lifetime Allowance.
  3. If you have pension funds in excess of the Lifetime Allowance which are unlikely to be required for your own income purposes, these funds could be withdrawn, keeping your pension fund at or close to the prevailing Lifetime Allowance, and gifted to children or grandchildren to help fund their pension contributions.
  4. We have seen a series of reductions to the Pension Lifetime Allowance since 2010/2011 when it then stood at £1.8M. Today’s allowance is £1,055,000 with an annual link to CPI inflation index, so ceasing all contributions could potentially result in not maximising your full allowance as, hopefully, the allowance increases each year as inflation increases. It is not possible to rule out further reductions in the Lifetime Allowance, but equally there have been numerous calls for a radical simplification of the pension rules, one of which could be to abolish the Lifetime Allowance completely and simply lower the amount that individuals can contribute to a pension each year.

In summary, we have looked briefly at the Lifetime Allowance again and this is clearly a very problematic issue for anyone affected, even before we consider all of the other related issues e.g. Annual Allowance tax charge, Inheritance Tax, alternative Income Tax and national insurance charges.

If you are concerned or affected by this tax charge please take advice and don’t bury your head in the sand!

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