UK Lifetime Allowance Taxes – How to Protect Your Pension

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UK Lifetime Allowance Taxes How to Protect Your
Pension
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While having a pension fund of over 1 million
may seem ideal, retirees face a complication. If
they contribute over the Lifetime Allowance
limit, they face potentially substantial tax
bills for the privilege.   These allowances
allow HMRC to impose taxes of up to 55 against
large pension planning withdrawals which could
have a dramatic impact on your retirement budget.
Expats have several available options to
safeguard their life savings from this steep tax
bill and minimise exposure. Well run through
some of those potential strategies
here.   Chase Buchanan works with expats
worldwide, providing comprehensive financial
advice and wealth management support to ensure
your financial future is protected. If you are
concerned about hitting the Lifetime Allowance
and triggering a disastrous tax charge, please
get in touch.
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Explaining the UK Lifetime Allowance
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• The Lifetime Allowance (LTA) is fixed at
  1,073,100. The government changed this limit in
  April 2020, and in the 2021 Budget, confirmed it
  would remain static until at least April 2026.
•  
• The LTA sets a ceiling on how much you can save
  in pension transfer specialists uk benefits
  without becoming liable for further taxes, on top
  of any tax deducted at source from the original
  contributions. What does that mean for pension
  savers? In short, it means that if you have a
  large retirement fund, you could be taxed 25 or
  even 55 of the value.
•  
• Fixing the LTA alongside inheritance tax
  thresholds can be seen to penalise those who have
  made good investment decisions. Many more people
  are impacted than might realise, with lots of
  individuals having
•  
• Multiple pension products, including private and
  occupational schemes.
• Employment pension benefits, perhaps without
  recognising the value.
•  
•  
• Given inflation, it is now likely to affect
  millions of people in the coming years that
  wouldnt necessarily consider themselves very
  wealthy but will now tip over the limit.

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Pension Schemes Included in the LTA Cap
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• One of the issues with the LTA is that it
  includes all uk pension for expats benefits
  across all products, so simply splitting your
  retirement assets across different accounts wont
  protect your funds from the LTA tax charges.
•  
• All pension benefits are included, apart from the
  UK State Pension, so that means
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• Defined contribution pension schemes.
• Private and occupational pension products.
• Defined benefit plans, calculated at 20 times the
  annual payments.
•  
• pension transfer specialist is designed to
  appreciate, and with accumulated contributions,
  interest, investment returns and tax relief, it
  is easier than you might imagine to reach that
  limit. For example, if you have a defined benefit
  scheme, based on your final salary from an
  employer, a pension worth 52,750 a year (or
  4,396 a month) will be considered 1,055,000 in
  value and therefore, over the LTA.
•  
• It is, therefore, crucial to calculate your total
  pension savings and take action quickly to make
  sure you arent exposed.

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Lifetime Allowance Tax Charges
Weve mentioned the LTA tax rates, but its
essential to understand when and where they
apply.   The tax is payable when you access those
pension savings, so a lot depends on whether you
are transferring your uk pension transfer
benefits overseas, withdrawing a lump sum, or
receiving regular income from your plan.
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• Lump-sum withdrawals over the LTA are taxed at
  55, taken from the funds before the balance is
  remitted to you.
• Regular retirement income, including purchasing
  an annuity, is taxed at 25 on top of any other
  taxes payable.
• Pension scheme administrators of defined
  contribution plans must deduct the 25 tax charge
  from the pot, leaving you with the remaining 75
  to use in retirement.
• Defined benefit schemes may deduct the tax and
  reduce your pension payments to recover the
  amount paid to HMRC.
•  
•  
• Living overseas, unfortunately, doesnt defend
  your retirement savings from these charges. Given
  the UKs double tax agreements with European
  countries, many international expats are not
  liable for British taxes on their UK pension
  income and pay the local rates.
•  
• That can be a compelling reason to consider a
  permanent move and enjoy minimal income tax
  deductions or beneficial foreign-source pension
  tax rates, maximising the value of your pension
  income. However, if your pension exceeds the LTA,
  HMRC will take precedence and impose the taxes
  before payments are made, with no option to claim
  credits or rebates in any residency position.

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Expat Protections from Lifetime Allowance Taxes
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• Now to the all-important solutions and ways to
  safeguard your life savings against losing a
  quarter, or over half, of your pension fund
  value.
•  
• HMRC assesses your status
•  
• When you first begin to access your pension.
• Every time you draw on your pension after that.
• Again at age 75.
•  
• Therefore, its vital to stay on top of the total
  value should this change. If you pass away, HMRC
  will test any lump sums paid to your
  beneficiaries for the LTA and deducted taxes
  accordingly.
•  
• Here are some of the most effective options
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Lifetime Allowance Protection
HMRC does grant protection from the LTA in some
specific circumstances. However, the rules are
strict, and you need to comply with several
conditions to be eligible.   For example, if
your fund was worth over 1 million in April
2016, you can apply for Individual Protection
2016 or Fixed Protection 2016. Fixed Protection
may apply if you had a scheme of this value in
2016, and havent since made any contributions,
directly or through your employer.   If you
think you may qualify for HMRC protection, please
get in touch, as it is crucial to seek
professional advice.
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Overseas Pension Transfers
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• Another option for expats is to opt for a pension
  transfer to a Recognised Overseas Pension Scheme
  (ROPS).
•  
• ROPS funds must be approved by HMRC and can
  provide a raft of substantial benefits,
  including
•  
• Limited exposure to Lifetime Allowance taxes.
• Lower pension tax rates.
• Flexibility over which currencies you save in.
• Advantages with estate planning and inheritance
  tax liabilities.
•  
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• There is an Overseas Transfer Charge to consider,
  currently levied at 25 on international pensions
  transferred out of the UK and into a foreign
  scheme this applied to all ROPS schemes outside
  the EU until December 2020 and may now apply to
  EU scheme transfers.
•  
• Pension funds in a ROPS account, once
  transferred, are not exposed to any LTA taxes,
  regardless of how much you save or by how much
  the fund value appreciates.

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Alternative Pension Fund Investments
A further alternative is to look at tax-efficient
investments outside of pension products. For
example, you might opt to withdraw your UK
pension benefits in cash and reinvest overseas in
your host country. Multiple investment routes may
deliver higher returns, greater flexibility, and
protection from pension taxes.   You might also
look at a Self-Invested Personal Pension (SIPP)
scheme, which avoids the Overseas Transfer
Charge, and means you can have more control over
how you invest your pension.
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• Again, however, there are tax implications with
  inheritance planning. The best option for your
  retirement fund will depend on many factors,
  including
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• The current value of your pension funds and
  projected future value.
• Where you live, and your plans to relocate
  abroad.
• Your retirement expectations, budgets and
  lifestyle aspirations.
• Estate planning and exposure to potential
  inheritance taxes.
•  
•  
• It is essential to seek tailored advice before
  making any decisions about your retirement funds,
  given the importance of this fund to support you,
  and your family, into the future.
•  
• Please contact Chase Buchanan for further
  information about any of the potential solutions
  explored here to craft the most beneficial
  strategy to protect your pension from LTA taxes.

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