Can I top up my pension again after the £1.1m Lifetime Increment is abolished?
Can I top up my pension after the lifetime allowance is abolished?
I am a person of retirement age who has not received the above-lifetime amounts of a private pension, and thanks to the Chancellor I am not now.
I have started drawing my state pension but my question is can I add more funds to my private pension.
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Retirement provision: Can I top up my pension again after the lifetime limit has been lifted?
Steve Webb responds: The March 2023 Budget introduced some big changes to how pensions are taxed, particularly for those on larger pensions, so I’ll try to highlight some of the key things you need to be aware of.
I will also address the possibility that a future government could reverse some or all of these changes.
Before I continue, I should clarify a few things.
– I will focus solely on the budget changes and not on the broader pros and cons of whether you should save more in a pension in your individual situation; Of course, you should seek advice on broader issues such as the implications for inheritance tax, the level of investment risk you are willing to take, and so on.
– I am assuming you are only thinking of personal contributions to a personal scheme, not a scheme where an employer funds savings for you.
As you mentioned, a major change in the household involved the lifetime old-age pension.
Currently, the LTA limits the amount of pension you can build up for life before an additional tax burden is triggered. According to the budget, the LTA is to be abolished from April 2024.
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However, the government did not have time to pass all the necessary legislation to abolish the LTA from April 2023, leaving only income tax to be paid on all withdrawals for 2023/24 where the LTA fee would have been charged.
Although the LTA is ongoing, the government is maintaining a cap on the amount of tax-free cash you can take with you, at 25 per cent of the current LTA (i.e. 25 per cent of £1,073,100, which is £268,275). .
This limit remains even after the LTA has expired.
However, if you have what is called “protection” that allows you to take a larger amount tax-free, that larger amount will still be taken into account.
(Note that in practice this cap is only part of some rather complicated rules for withdrawing tax-free cash.)
You mention that the value of your pension pot exceeds the lifetime limit. In principle, nothing stands in your way if you want to refill this pot.
However, the very important additional caution here is that if you have what is known as lifetime pension protection (specifically one of the fixed or enhanced protections) and you contribute before April 6, 2023, that protection would be lost and this could have important consequences – z for your leeway, for example, to withdraw tax-free cash.
Whether you’re protected or not, if your funds are already at or above your lifetime allowance, additional contributions may not increase your scope to take tax-free cash due to the cap above.
The usual rules apply to payments into the 2023/24 pension.
– Annual allowance still applies (from which contributions trigger an AA charge), although with an increased limit of £60,000 (for all but those on the highest incomes) this may not be a huge limitation, especially if you can have unused AA be carried over from previous years.
– The money purchase annual fee continues to apply; For example, if you’ve tapped into a ‘pot of money’ pension (over £10,000) and taken taxable cash, from 2023/24 you’ll only be allowed to pay in £10,000 a year without being charged the AA fee.
– It is crucial that you are only relieved to the extent that your contributions come from your income. If you’ve stopped working you can only pay in £3,600 (excluding tax credit) if your ‘relevant UK income’ is below that number.
In terms of the attractiveness of saving for retirement, you should carefully consider what tax relief you pay on your contribution compared to the tax you receive on the benefits you ultimately receive.
For example, if you’re currently a property taxpayer, you’ll get a 20 percent tax break on money you put into a pension, but if you use up your pension pot quickly, you might end up paying 40 percent tax later in retirement, which might not be much.
A key variable that is difficult to predict is what might happen if there were a change in government.
As you may have seen, the Labor Party has said it would reverse these changes and introduce a lifetime allowance when she takes office. But there is still very little information about what that would mean in practice.
In the past, when the LTA has been cut, the government making the cut has put in place various “safeguards” so that those already over the limit and with some funds not started do not lose, but at this stage there are none Guarantee that this would happen again.
Therefore, think carefully about whether you take actions now that could result in a high tax burden in the event of future rule changes.
Given the amounts of money involved, I would strongly recommend that you seek professional advice so that you can make the right decision based on your unique situation.
Ask Steve Webb a retirement question
Former Pensions Secretary Steve Webb is the uncle of This Is Money’s Agony.
He’s ready to answer your questions about whether you’re still saving, about to quit work, or juggling your finances in retirement.
Steve left the Department for Works and Pensions after the May 2015 election. He is now a partner in actuarial and advisory firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in an upcoming column, but he will not be able to reply to everyone or correspond privately with readers. Nothing in its answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number in your message – this will be kept confidential and will not be used for marketing purposes.
If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free retirement help to the public. It can be found here and phone number 0800 011 3797.
SteveWe get a lot of questions about government pension projections and COPE – the Contracted Out Pension Equivalent. When you write to Steve on this subject, he’s responding to a typical reader question Here. It includes links to Steve’s several previous columns on state pension projections and contracting that may be helpful.
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