Should I stop pension contributions in case Lifetime Allowance falls further?
|Retirement | Pension Rules
Asked by mickz, submitted
15 May 2013.
As I'm only 50, I didn't think I needed to worry about the Lifetime Allowance just yet, but I can see a potential problem coming...
My pension pot is currently worth around £500,000 (enough to buy a £17k per annum pension) but with inflation likely to be high, and the Lifetime Allowance likely to come down, then when I'm 65 I can see that I might have exceeded the Lifetime allowance - even if I don't contribute any more to my pension pot. ( 5% inflation for 15 years takes the pot to just over 1 million, and the Lifetime allowance has already come down from 1.8 to 1.5 to 1.25 million. Coming down to less than 1 million is not inconceivable).
I'm likely to earn more now than when I was a trainee, so what are your thoughts on the best way to plan ahead for retirement.
Answered by Justin on 28 June 2013
Yes, this is a dilemma. You'd like to think the Lifetime Allowance will increase again at some point (by inflation if nothing else), but the chances look slim for as long as the Government remains cash strapped.
A simple option would be to take pension benefits before retirement (provided you're age 55 or over) if it looks likely your pension fund is in danger of exceeding the Lifetime Allowance. For example, you could take 25% of your pension fund as tax-free cash and opt for income drawdown. This means you can draw between 0-120% of a pension based on a single life annuity each year (calculated via what are called 'GAD' rates), so there's no need to take income if you're still working and don't need it. The Lifetime Allowance test would apply again if you subsequently buy an annuity or reach age 75 (and the calculation would include the tax-free cash you've already taken), but if you start drawing an income this may not prove a problem.
An alternative would be to cease pension contributions and use other ways to save towards retirement. For example, shares ISAs, which don't offer tax relief on contributions but do provide tax-free income. And if you need to save beyond the annual ISA allowance, £11,520 for 2013/14, then you could use conventional investments and try to offset gains against your annual capital gains tax allowance (£10,900 for 2013/14).
If you don't mind taking a potentially high level of risk you could consider venture capital trusts, which offer 30% tax relief on contributions into new subscriptions provided you hold the VCT for at least 5 years. Gains and income are not taxed either. But be careful, tax breaks are little use if they're wiped out by losses.
On balance I don't think you need be too concerned about the Lifetime Allowance at this point. If you're otherwise happy contributing into your pension then I'd consider doing so for another five years or so while waiting to see whether any further reduction in the Lifetime Allowance looks likely.
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