I am an avid reader of Moneywise and I hope you may be able to provide some advice as this issue may affect quite a few people.
When the £1 million lifetime limit for pensions was introduced last year, I had what looked like a fair margin before I got to that point. I carried on paying into my defined contribution pension after 1 April 2016 for four months and my employer matched my contributions. I then retired without taking my pension.
I will be drawing my final salary pension in October and have just received an updated value, so I also checked the value of my defined contribution pension and found that the value has increased significantly. My payments in only accounted for part of this and the rest I assume is down to the good performance of the stock market. The combination of the two now takes me over the £1 million lifetime limit.
Is there anything I can do or do I just have to pay tax on the surplus at the point I take the defined contribution pension?
I’m afraid there is little you can do about the fact you have gone over the lifetime allowance as the two protections that are available don’t apply to your situation.
To apply for individual protection – that would have protected your lifetime allowance to the lower of its value in April 2016 or £1.25 million – you would need to have gone over the £1 million limit before April 2016, which you hadn’t.
To qualify for fixed protection – which also would have given you a £1.25 million lifetime limit – you would have had to not have made any contributions to your pension after April 2016, which you did.
However, your position is not as bad as you fear. You will only have to pay the additional tax on the surplus over £1 million, so you can draw a pension up to this level and just pay your marginal rate of income tax. It is only when you go over that £1 million level that you will start paying the additional tax charge. It is levied as 25% on money taken as income – either through an annuity or drawdown – or 55% on lump sum withdrawals.
The charge would also be paid if your pension pot is worth more than £1 million when you turn 75 or on your death, if earlier, but, again, only on the amount above £1 million.
In addition, from October 2018 the lifetime allowance will start to increase in line with CPI (Consumer Price Index) inflation, which may give you some additional relief.
The lifetime pension allowance is £1 million. If your defined contribution pension pot exceeds this amount, it will attract additional tax at up to 55% on the surplus.
The annual pension allowance is based on your annual earnings. Pay more than £40,000 into your pension in one year and you won’t receive tax relief on the surplus and will also face an annual allowance charge. However, you may be able to carry over previous years’ unused allowances.
Read the Moneywise guide on how to beat the £1m lifetime allowance for more info.
Elaine Skelton is an associate at BHP Chartered Accountants.