During the spring Budget in March, chancellor Jeremy Hunt unveiled a range of changes to pension tax legislation. These were mostly designed to encourage those approaching the end of their careers to continue working for longer.
Notably, one change that may be of particular interest to you as a high net worth individual is the suspension of the tax charge on pension wealth that exceeds the Lifetime Allowance (LTA). There are also plans to scrap the threshold entirely in future.
Standing at £1,073,100 in the 2023/24 tax year, the LTA was previously a limit on how much you could tax-efficiently contribute to your pension(s) throughout your lifetime. If the value of your savings exceeded it, you could have faced a tax charge when withdrawing funds in excess of the limit of:
- 55% on lump sums
- 25% on savings taken as income, on top of your marginal rate of Income Tax.
Now, without this tax charge in place, it essentially means there is no lifetime limit for tax-efficient pension saving – or at least no penalty if you exceed the threshold.
This may have led you to consider working for longer so you can contribute even more to your pension, as is the case for many high net worth individuals.
Indeed, according to Professional Adviser, more than two-thirds of high net worth individuals are thinking about working for longer than they initially planned, thanks to the scrapping of the LTA charge.
However, while this may make pension saving more attractive, there are some additional considerations you may want to think about if you now plan to extend your career a further few years.
Read on to find out about a few of these aspects.
Keep an eye on how much tax you’re paying
If you plan to work for longer, it’s important to keep an eye on how much Income Tax you may pay. That’s because you may start to draw from your pension while still earning money from your career.
You can typically start accessing your pension from the normal minimum pension age of 55 (rising to 57 in 2028).
Crucially, though, while you can usually take the first 25% of your pot tax-free, the remainder of your pension income will typically be subject to Income Tax.
So, if you start drawing money from your pension while continuing to work, you may see your Income Tax bill increase.
Of course, you could leave your pension untouched and live on your working income until you decide to retire.
It can be useful to speak to a financial planner, as they can help you make informed choices with your wealth that help you to reach your goals while minimising the tax you’ll face.
Be aware of your pension Annual Allowance
Although the LTA tax charge is suspended, you should still take careful note of your pension Annual Allowance. This is the maximum amount you can tax-efficiently contribute to your pension in a single tax year.
In 2023/24, the Annual Allowance is the lower of £60,000 or 100% of your earnings. This includes the tax relief you can receive on your contributions, as well as any employer contributions.
You may face a tax charge on contributions in excess of the Annual Allowance. So, be aware of this limit if you’re contributing money to your pension to make the most of the LTA changes.
If you haven’t used your entire Annual Allowance from up to the three previous tax years, you may be able to carry this forward. However, if you have already made full use of it, you’ll only have up to the standard amount available.
It’s also worth noting that your Annual Allowance may be reduced if you flexibly access your pension. In this case, you may be subject to the “Money Purchase Annual Allowance” (MPAA), lowering your tax-efficient threshold to just £10,000.
As a high net worth individual, you may have been subject to the Tapered Annual Allowance throughout your career if you have had a particularly high income. This may mean you might have already had a lower Annual Allowance, perhaps even down to the minimum of £10,000.
But, if you have been able to use the full Annual Allowance before, it may be worth checking whether you are now subject to the MPAA if you have flexibly accessed your pension.
Speak to a professional if you’re unsure what your Annual Allowance will be.
Remember that pension rules could change in future
It’s very much worth noting that while the LTA charge is suspended and the entire threshold set to be removed in future, pension rules could easily change. This could affect the future tax efficiency of your pot.
In fact, MoneyAge reported shortly after the removal of the LTA charge that the Labour party would reintroduce the threshold and the charge if they won the next general election.
While nothing is certain about what will happen in future, any changes could affect the decisions you make now.
It’s worth keeping this in mind when deciding whether to work for longer and contribute more money to your pension. It also underlines the importance of working with an expert, who can help you make the most appropriate decisions amid changing legislation.
Consider whether you need to continue working
While the changes to the LTA could make pension saving even more attractive as you approach the end of your career, one question worth asking yourself is: “Do I need to continue working?”
Realistically, the reason you save money into your pension is so that you can live your desired lifestyle in retirement. As a result, if you’ve already accrued enough in your fund to reach your goals, you might not actually need to continue working.
This is an area where a financial planner can add real value. At Rosebridge, we’ll discuss your ambitions as well as your wealth, so that you’re able to use your money to get what you want out of life.
Whether that means working for a few extra years to maximise your savings so you’ll be able to pass more to your loved ones, or stopping now to enjoy the wealth you’ve earned, we can help you with personalised advice.
Get in touch
Need help managing your wealth as a high net worth individual? Please speak to us at Rosebridge.
Email email@example.com or call 01204 300010 to get in touch today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.