Estimated reading time: 4 minutes
My favourite game of all time has to be Monopoly. I love it. When I play, I have to be the top hat and I have to buy Old Kent Road and Whitechapel Road. After that, I buy as many colour sets of properties as I can, so I can build houses and hotels on them and collect lots of lovely rent from the other players.
One of the problems with my strategy is that there is a ‘Chance’ card in the game, with the dreaded statement, “You are assessed for street repairs: £40 per house, £115 per hotel”. On more than one occasion I have been doing really well in a game, and then to my dismay I have picked that Chance card and had to hand over my well-earned savings to the Banker. In effect, I’ve been taxed for being successful.
To me, the lifetime allowance (LTA) charge for pension savings is akin to picking that Chance card in a game of Monopoly. For example, you and/or your employer pays contributions into your SSAS or SIPP - you invest the funds wisely, your investments do well - and when it is your turn to draw benefits, you cross your fingers and hope that your pension savings haven’t exceeded a certain level (the LTA) meaning that you don’t have to pay a LTA charge to HM Revenue & Customs.
The LTA is currently £1 million, and if your pension savings exceed this amount when you come to switch on your benefits, you could be liable for a LTA charge of either;
Income Tax will be applied to the pension payments at your marginal rate of income tax when you draw them. The good news is that the LTA will rise to £1.03 million in the 2018/19 tax year. The bad news is that this is the first time the LTA has risen in eight years, and it is nowhere near the £1.8 million amount that it was in 2011.
Whether you will have to pay a LTA charge may seem like a game of chance, but it doesn’t have to be. There are some ways you can take control of your pension savings:
We strongly suggest that you seek advice from your financial adviser before making any decisions. It is worth remembering that the LTA charge is only applied to any pension savings in excess of the LTA when you switch on your benefits. It may be that taking a chance that a LTA charge will have to be paid is the best option for you, taking into account your personal circumstances, and your plans for your pension savings; just like my strategy when I’m playing Monopoly.
Now, can anyone tell me how to win first prize in a beauty contest? When I play Monopoly, I only ever seem to be able to win second prize!