Mouthy Money has started a new series looking at personal finance questions from readers. If you would like to ask a question about anything to do with your money, get in touch here.
This week we have a reader asking a question about his pension. Answering is Fiona Hanrahan who is intermediary development and technical manager at pensions firm Royal London.
Reader question: When a 60-year-old (male) person has reached their current pension lifetime allowance is it still worth making further pension contributions in the hope the lifetime allowance increases after future budgets / governments. I don’t plan to take any pension withdrawals until age 70.
Expert answer: The lifetime allowance (LTA) is expected to remain at £1,073,100 until the end of tax year 2025/26. After this point it could rise in line with the consumer prices index (CPI) as it did prior to 6 April 2021 but this is uncertain.
Investment fund growth over 10 years could be higher than any potential LTA increases. Any tax free cash is limited to 25% of the LTA.
Any funds taken in excess of the LTA face a tax charge of 55% (if taken as a lump sum) or 25% plus income tax (if taken as income). If the individual receives employer contributions then it’s often better continuing to receive these as even with a tax charge they are normally better off.
This decision can be more complicated if the employer offers additional salary in lieu of any employer contributions. So, it’s worth asking if the employer has such an arrangement. But, additional salary will be taxed too.
If it’s simply a choice to pay individual contributions or not then the benefit of any tax relief received is effectively wiped out by the LTA tax charge. So, there could be a better home for these savings for example an ISA.
But, if inheritance tax (IHT) is a worry, a pension rather than an ISA might still be better as pensions are normally exempt from IHT. Taking financial advice is crucial as these calculations and wider planning issues need to be considered annually.
Mouthy Money says: We agree, this is a complicated financial problem for the reader with no cut and dry answer. We’d recommend he consider seeking financial advice to take a professional view of his situation and how he might better arrange his money.