The persistent warm weather this summer and the opportunity to get out and do more makes a lot of people in later life think about retiring. Before they do, however, it is important to think about getting their financial affairs in order to minimise the likelihood of falling foul of easily-avoidable ‘tax traps’.
Pensions lifetime allowance
Those with pension pots of £1 million or more need to think about the pensions lifetime allowance (LTA). This is a limit on the amount of pension benefit that can be drawn from pension schemes before an extra tax charge applies.
Since April 2018, the lifetime allowance is £1,030,000, and so if someone is nearing that amount, they might benefit from taking their pension early or stopping contributions to the scheme, even if they have not retired, to avoid their benefits exceeding the lifetime allowance.
However, this decision should not be taken lightly, as even though someone with a pot of more than the allowance will be taxed at 55 per cent on the excess amount, it is surely better to have 45 per cent of something than 100 per cent of nothing. Ideally, anyone in this position, should seek professional, tailored advice.
‘Tapered’ annual pension allowance
Similarly, since 6 April 2016, there has been a ‘tapered’ annual pension allowance for people on higher incomes. This means that the annual allowance, which is £40,000, is reduced by £1 for every £2 that a person’s total income exceeds £150,000 – subject to a minimum tapered annual allowance of £10,000.
It would therefore be a good idea for some savers to make use of ‘carry forward’ rules to maximise contributions in excess of the annual allowance. This would mean they could still receive tax relief by carrying forward unused annual allowances from up to three previous tax years.
As total income includes everything that a person earns, not just their salary, it would again make sense for a person to seek professional advice to ensure that all applicable income has been properly included in their calculations.
If you require further assistance with regards to any personal tax matters, please contact MD Consulting.