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Reprieve for pensions but lifetime allowance increase creates tax planning opportunities

For clients in or approaching retirement the autumn budget offered little, but the expected rise of the pensions lifetime allowance in line with inflation does provide a new tax planning opportunity.

The lifetime allowance will increase from £1,000,000 to £1,030,000 from April next year.

An increase of £30,000 does not sound like much but for clients with larger pension savings it does create new opportunities to save tax and the rewards could be sizable.

There are some scenarios in which a small increase in lifetime allowance could reduce the lifetime allowance tax charge by more than £16,000.

For example, if a client has a £1,100,000 pension pot with no lifetime allowance protection, the excess pension funds would be taxed at 55% if taken as a lump sum (£55,000)

If the client does not take their benefits until the start of the following tax year (2018/2019) when the lifetime allowance is £1,030,000, tax on the excess is only £38,500, saving £16,500.

Whilst the increase in lifetime allowance seems small, it still provides valuable planning opportunities. If clients in this category can delay taking some or all of their benefits until after April 2018, this might help reduce or in some cases eliminate the tax charge which faces investors with larger pension pots.

This entry was posted on November 28, 2017