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Pension tension - Lifetime Allowance and Business Relief

In 2011/12, the lifetime allowance (LTA) for pension contributions stood at £1.8 million. This is the maximum amount an individual can have in their pension without facing a tax penalty. It now stands at £1,030,000.

Since pensions are the traditional tax-efficient home of our spare cash once we’ve exhausted our youthful spending sprees, bought a house and realised that life is short and retirement is expensive, this is not an ideal scenario. Especially against the backdrop of the rising cost of living.

IHT Chart

Huge Penalties

It’s even worse if you’re slapped with what amounts to a huge fine for breaching the rules – up to 55% – depending on whether the excess is taken as a pension or a lump sum.

Figures reported this week show that these additional tax charges are actually increasing, with tax collected by HMRC due to people contributing more to their pensions than the rules allow, doubling in three years; 2,410 individuals were caught by the LTA tax rule in 2016/17 compared with 1,020 in 2014/15 (Financial Times). The additional charges totalled £110 million.

This tells us two things; there is a lack of awareness of these pensions changes that is not going away and, as we suspected, the restrictions are leaving individuals with excess funds that they want to safeguard for later life.

Planning Opportunities

These are both financial planning opportunities and a chance for you to add significant value to client relationships, particularly if IHT is a client concern; Business Relief (BR), for example, is one of the most flexible methods of building capital for the future.

The 2015 changes to pension regulations made many pensions IHT free (if the person dies under the age of 75, and taxed at the recipient’s marginal rate if they die on or after age 75). Pensions freedoms also opened up the choice of beneficiaries to anyone you choose. But, there is no limit to how much you can invest into BR and it is flexible enough to let you access the funds if you need to, unlike pensions, where possible tax penalties can apply if you draw down funds.

BR also offers the real potential of growth and the two-year qualification period (rather than seven years for gifts) for 100% IHT exemption is convenient for those who have left it late to consider estate planning outside of their pension.

Pensions are great

When it comes to tax efficiency, pensions are still a great option. But increasingly, there are funds that are excluded from pension wrappers that benefit from other tax-efficient planning solutions.

For more information on Business Relief and the Oxford Capital Estate Planning Service, please click here.


Oxford Capital is not able to offer financial advice and this blog should not be construed as advice. Tax planning and BR tax reliefs depend on individual circumstances and are subject to change.