For example, someone aged 40, who has no previous pension savings, and who starts to pay 12 per cent of a £90,000 salary into a pension (combined employer and employee contribution rate) could exceed the £1.25 million Lifetime Allowance by the age of 65, according to figures from MGM Advantage. Under current taxation, this would mean they incur a hefty tax bill on any pension over the allowance.
It sounds worrying, but needs to be put into perspective. For people with many years to go until retirement, the new lifetime limit should not be a disincentive to pile as much as possible into a pension. You shouldn’t prioritise the risk of over-saving before that of under-saving.
No one should let the tax tail wag the investment dog, particularly as the tax climate 20 or 30 years from now cannot be predicted. No-one should turn down a generous employer contribution because they may run the risk at some point in the future of a big tax bill. Instead, focus on the compounding effect of interest on the amount you save in income tax by putting your money into a pension, and the amount that your employer contributes on your behalf. With good investment returns, this compounding effect on saved income tax and employer contributions could outweigh any additional tax.
Also, no one knows what the future brings. Our 40-year old may be made redundant or suffer poor health at 50 and never find another high-paying job. Investment returns may not work out as planned.
Yes, you might want to hedge your bets by paying into an individual savings account (Isa) as well, so that you have another pot of money from which to draw a tax-free income. Or you could pay into a spouse’s pension to spread your tax. But both of these strategies make sense even if there wasn’t a Lifetime Allowance on pensions.
• Read about other strategies to beat the Lifetime Allowance here.
