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2 OUT OF 3 PEOPLE ‘SLEEPWALKING’ INTO LTA-TRIGGERED TAX CHARGES

An alarming number of people are sleepwalking into tax charges for breaching the lifetime allowance on pensions, warns the Head of Advice at the UK division of one of the world’s largest independent financial advisory organisations.

The warning from Mitch Hopkinson at deVere United Kingdom, part of deVere Group, follows the cut of the amount of money you are able to save into a pension – known as the lifetime allowance (LTA) – from £1.25m to £1m in April.

Mr Hopkinson comments: “Before seeking independent advice, an alarming number, around two thirds, of new clients were potentially sleepwalking into tax charges for breaching the recently reduced lifetime allowance.

“Previously only the highest income earners were likely to be caught out by the LTA threshold.  But thanks to repeated cuts in the value of the allowance – the latest in chancellor George Osborne’s 2015 Budget, in which it was cut to £1m -middle England is really being hit.  A surprising amount of people simply don’t realise that they could be slapped with a tax bill for breaching the limit.

“£1m sounds like a lot, but when you take into account investment growth, you could find yourself inadvertently going over that threshold a lot easier and sooner than you might think.”

He continues: “If you think you may be in danger, you should review your retirement plans sooner rather than later with an independent financial adviser.

“There are two important factors to consider. First, working out whether you are close to the LTA differs depending on whether you are in a defined contribution or defined benefit pension.

“And second, how you will be taxed if you do cross the threshold will depend on whether you take the excess as a lump sum or as income.  Those who take the extra as a lump sum will pay 55 per cent upfront and the remainder will be paid directly to them.  Those who decide to take it as income will pay 25 per cent upfront and the remainder is put into the rest of the fund, which is taxed at marginal rates.

“An independent financial adviser will be able to advise on how you might be able to mitigate the affects of the LTA reduction.”

Mitch Hopkinson concludes:  “Like many, I am of the view that the lifetime allowance should be abolished.  It sends out completely the wrong message about prudently saving for one’s retirement – and this could be detrimental to families and to the long-term, sustainable economic growth of the country.

“However, until such time as the government sees sense and scraps it, I would urge those who feel they could be caught out to act now.  They should ensure that they are conscious to the threat of breaching the threshold and then subsequently being presented with a rather unwelcome surprise.”