Lifetime Allowance may Reduce to £1 Million this year
In April 2016, lifetime allowance may reduce form £1.25mil to £1mil. This is a significant reduction, and you may find that your tax increases significantly as a result. This blog outlines the changes you could well see after April this year.
Should Lifetime Allowances (LTA) Take Effect
At certain key events your lifetime allowances will be tested against the following criterion to see if you have broken the £1m threshold. If you have, you will find your tax bill increasing. Your lifetime allowance will be tested when:
- When you drawdown a lump sum from a pension at age 55+
- At 75 when you access your pension
- Should you die before you are aged 75
- If you transfer your pension fund to a QPROPS-the amount will be tested against lifetime allowance.
How much Tax will you Pay?
If the proposed changes go through you will pay the following tax charges once your break the LTA threshold:
- 55% on lump sums
- 25% on pension incomes
- 25% on QPROPS transfer
The UK government is also proposing a protection against lifetime allowance tax charges. In essence they are:
- Fixed Protection 2016: Providing you accrue no further pension benefits you can retain the £1.25m threshold for lifetime allowance
- Individual Protection 2016: Alternatively, you may want to opt for this form of protection. In this instance you can set your LTA between £1m and £1.25m and make contributions. Once you go above the threshold however, you will be taxed as outlined above.
- QPROPS are only tested when a transfer is made, and as such can keep growing without penalty.
Defined benefit and defined benefit contribution schemes will also be taken into account for LTA. In the case of defined benefit, they are multiplied by a factor of 20 to calculate capital value.
Award Winning Financial Planning
Although still in the planning stage all signs point to a reduction in LTA. Should this happen, you could be caught unawares derailing our plans for your retirement. It is a good idea to speak to me today. I can help protect against the incursions of the Treasury, and minimise your tax payments.