George Osborne announced last week the Lifetime Allowance (LTA) is to be reduced from £1.5m to £1.25m from 2014, causing a conundrum for wealthy savers. If they continue paying into their pension they may exceed the limit and face a hefty tax bill.
Earlier this year Investors Chronicle wrote how auto-enrolment could invalidate fixed or enhanced protection on your pension, but if you don’t have this protection already, there a small number of cases in which you may be better off exceeding it.
If you only face tax charges on future provision, continued pension funding might still make sense if your employer offers you pension contributions with no alternative compensation if you refuse it. If you break the limit you would still receive at least 45 per cent of that contribution (after 55 per cent LTA tax) which is better than nothing at all.
You might also do better to break the limit if it still gives you a tax benefit. For example, if you get 50 per cent relief on the contributions (or even if contributing via salary sacrifice), you will then get investment growth on the gross contribution and may only pay 20 per cent income tax on the pension income when they take it. Even with the 25 per cent LTA tax on pension income (composite 40 per cent tax charge when combined with LTA tax,) you’ll still be well ahead of the game.
Jamie Jenkins, head of workplace strategy at Standard Life, said the new lifetime allowance is placing a "material restriction" on high earners’ ability to secure themselves a retirement income even vaguely comparable to their wages.
And he added: "Employers need to get more creative - workplace individual savings account (Isas) could help people not to have to turn down benefits if they aren't sure whether or not they should exceed the pensions limit. If you think you may be better off exceeding the limit to receive benefits, you should seek financial advice first."
Alternatives to investing in a pension include workplace Isas, Approved and Unapproved Share Schemes, and other share schemes such as Joint Share Ownership Plans.
