UK Lifetime Allowance Taxes – How to Protect Your Pension
While having a pension fund of
over £1 million may seem ideal, retirees face a complication. If they
contribute over the Lifetime Allowance limit, they face potentially substantial
tax bills for the privilege.
These allowances allow HMRC to
impose taxes of up to 55% against large pension
planning withdrawals – which could have a dramatic impact on
your retirement budget. Expats have several available options to safeguard
their life savings from this steep tax bill and minimise exposure. We’ll run
through some of those potential strategies here.
Chase Buchanan works with expats
worldwide, providing comprehensive financial advice and wealth management
support to ensure your financial future is protected. If you are concerned
about hitting the Lifetime Allowance and triggering a disastrous tax charge,
please get in touch.
Explaining the UK
Lifetime Allowance
The Lifetime Allowance (LTA) is
fixed at £1,073,100. The government changed this limit in April 2020, and in
the 2021 Budget, confirmed it would remain static until at least April 2026.
The LTA sets a ceiling on how
much you can save in pension
transfer specialists uk benefits without becoming liable for
further taxes, on top of any tax deducted at source from the original
contributions. What does that mean for pension savers? In short, it means that
if you have a large retirement fund, you could be taxed 25% or even 55% of the
value.
Fixing the LTA alongside
inheritance tax thresholds can be seen to penalise those who have made good
investment decisions. Many more people are impacted than might realise, with
lots of individuals having:
·
Multiple pension products, including private and
occupational schemes.
·
Employment pension benefits, perhaps without
recognising the value.
Given inflation, it is now likely
to affect millions of people in the coming years that wouldn’t necessarily
consider themselves very wealthy – but will now tip over the limit.
Pension Schemes
Included in the LTA Cap
One of the issues with the LTA is
that it includes all uk pension for expats
benefits across all products, so simply splitting your retirement assets across
different accounts won’t protect your funds from the LTA tax charges.
All pension benefits are
included, apart from the UK State Pension, so that means:
·
Defined contribution pension schemes.
·
Private and occupational pension products.
·
Defined benefit plans, calculated at 20 times
the annual payments.
pension transfer specialist is designed to
appreciate, and with accumulated contributions, interest, investment returns
and tax relief, it is easier than you might imagine to reach that limit. For
example, if you have a defined benefit scheme, based on your final salary from
an employer, a pension worth £52,750 a year (or £4,396 a month) will be
considered £1,055,000 in value – and therefore, over the LTA.
It is, therefore, crucial to
calculate your total pension savings and take action quickly to make sure you
aren’t exposed.
Lifetime Allowance Tax
Charges
We’ve mentioned the LTA tax
rates, but it’s essential to understand when and where they apply.
The tax is payable when you
access those pension savings, so a lot depends on whether you are transferring
your uk pension
transfer benefits overseas, withdrawing a lump sum, or
receiving regular income from your plan.
·
Lump-sum withdrawals over the LTA are taxed at
55%, taken from the funds before the balance is remitted to you.
·
Regular retirement income, including purchasing
an annuity, is taxed at 25% on top of any other taxes payable.
·
Pension scheme administrators of defined
contribution plans must deduct the 25% tax charge from the pot, leaving you
with the remaining 75% to use in retirement.
·
Defined benefit schemes may deduct the tax and
reduce your pension payments to recover the amount paid to HMRC.
Living overseas, unfortunately,
doesn’t defend your retirement savings from these charges. Given the UK’s
double tax agreements with European countries, many international expats are
not liable for British taxes on their UK pension income – and pay the local
rates.
That can be a compelling reason
to consider a permanent move and enjoy minimal income tax deductions or
beneficial foreign-source pension tax rates, maximising the value of your
pension income. However, if your pension exceeds the LTA, HMRC will take
precedence and impose the taxes before payments are made, with no option to
claim credits or rebates in any residency position.
Expat Protections from Lifetime Allowance Taxes
Now to the all-important
solutions – and ways to safeguard your life savings against losing a quarter,
or over half, of your pension fund value.
HMRC assesses your status:
·
When you first begin to access your pension.
·
Every time you draw on your pension after that.
·
Again at age 75.
Therefore, it’s vital to stay on
top of the total value should this change. If you pass away, HMRC will test any
lump sums paid to your beneficiaries for the LTA and deducted taxes
accordingly.
Here are some of the most
effective options:
Lifetime Allowance Protection
HMRC does grant protection from
the LTA in some specific circumstances. However, the rules are strict, and you
need to comply with several conditions to be eligible.
For example, if your fund was
worth over £1 million in April 2016, you can apply for Individual Protection
2016 or Fixed Protection 2016. Fixed Protection may apply if you had a scheme
of this value in 2016, and haven’t since made any contributions, directly or
through your employer.
If you think you may qualify for
HMRC protection, please get in touch, as it is crucial to seek professional
advice.
Overseas Pension Transfers
Another option for expats is to
opt for a pension transfer to a Recognised Overseas Pension Scheme (ROPS).
ROPS funds must be approved by
HMRC and can provide a raft of substantial benefits, including:
·
Limited exposure to Lifetime Allowance taxes.
·
Lower pension tax rates.
·
Flexibility over which currencies you save in.
·
Advantages with estate planning and inheritance
tax liabilities.
There is an Overseas Transfer
Charge to consider, currently levied at 25% on international pensions
transferred out of the UK and into a foreign scheme – this applied to all ROPS
schemes outside the EU until December 2020 and may now apply to EU scheme
transfers.
Pension funds in a ROPS account,
once transferred, are not exposed to any LTA taxes, regardless of how much you
save or by how much the fund value appreciates.
Alternative Pension Fund Investments
A further alternative is to look
at tax-efficient investments outside of pension products. For example, you
might opt to withdraw your UK pension benefits in cash and reinvest overseas in
your host country. Multiple investment routes may deliver higher returns,
greater flexibility, and protection from pension taxes.
You might also look at a Self-Invested
Personal Pension (SIPP) scheme, which avoids the Overseas Transfer Charge, and
means you can have more control over how you invest your pension.
Again, however, there are tax
implications with inheritance planning. The best option for your retirement
fund will depend on many factors, including:
·
The current value of your pension funds and
projected future value.
·
Where you live, and your plans to relocate
abroad.
·
Your retirement expectations, budgets and
lifestyle aspirations.
·
Estate planning and exposure to potential
inheritance taxes.
It is essential to seek tailored
advice before making any decisions about your retirement funds, given the
importance of this fund to support you, and your family, into the future.
Please contact Chase Buchanan for
further information about any of the potential solutions explored here to craft
the most beneficial strategy to protect your pension from LTA taxes.
Original Source :- https://chasebuchanan.com/uk-lifetime-allowance-taxes/
Comments
Post a Comment