Is your pension going to pay for the huge cost of the pandemic?
After spending to bolster public services and support those unable to work, the total cost of the pandemic is eyewatering.
Official figures from the Institute for Government showed that government borrowing reached £394 billion by November 2020, as the chancellor opened the coffers to support a flailing economy.
According to figures from the Office for Budget Responsibility, Economic and Fiscal Outlook and published by the Institute for Government, public borrowing for Covid was spent in three key areas:
- Supporting public services – £127 billion was spent on bolstering the NHS, purchasing personal protective equipment (PPE), and building the Track and Trace system.
- Supporting households – £82 billion was spent on supporting individuals, including the Coronavirus Job Retention Scheme, or “furlough” scheme, and the Self-Employed Income Support Scheme (SEISS).
- Supporting businesses – An expected total of £87 billion will be loaned to businesses under three separate schemes, of which £31 billion is expected to never be repaid.
However, this spending will have to be paid for somehow, and some experts are looking at a possible “pension raid” that the chancellor could put in place to help plug the hole that Covid has left in the public finances.
So, could your pension be the place the chancellor will look to pay for the huge cost of the pandemic?
Frozen pension Lifetime Allowance to pay for Covid
As part of the plans to pay for all this public borrowing, the chancellor announced in his spring Budget that he would be freezing the pension Lifetime Allowance (LTA) until 2026.
The LTA is the maximum amount of pension contributions that you can receive tax relief on in your lifetime.
The LTA has been £1,073,100 since 2020. Typically, it’s supposed to rise in line with the consumer price index (CPI) each year. However, this freeze means that the LTA will stay at its current level until 2026.
A pension raid under another name
The LTA has changed a lot over the past 15 years.
After reaching an all-time high of £1.8 million in 2011, it was reduced to just £1 million in 2016.
Since then, it was steadily rising in line with the CPI, ensuring savers’ retirement pots kept pace with inflation, while also allowing them to make the most of the tax relief on offer.
However, the freeze will stop this trend, potentially pushing wealthy savers and better-off workers over the limit.
This is because if you withdraw a lump sum from your pension over the LTA, it will be taxed at 55%. Meanwhile, if you take your pension as income while exceeding the LTA, you’ll be charged 25% on top of your marginal rate of Income Tax.
According to This is Money, the freeze will raise the government around £250 million a year in extra tax charges, as more pots are pushed over the limit.
This will most likely affect those with high incomes, self-invested personal pensions (SIPPS), final salary pension schemes, or even just those who started saving towards retirement early in their lives.
That’s why some experts and analysts see the freeze as a “pension raid” under another name, helping to balance out the heavy spending caused by Covid.
What to do if you’re approaching the LTA
If you’re concerned that you’re going to reach the LTA before you retire, there are a few methods you could consider to avoid a tax charge.
1. Think about retiring sooner
By retiring sooner than you might have previously intended, you can stop making contributions and start drawing your funds, slowing the overall growth of your pot.
You should speak to an adviser before you do this to make sure you can afford to stop working.
2. Reduce your pension contributions
While it’s often not a good idea to stop entirely, you could reduce the size of your pension contributions to a value that won’t exceed the LTA. Make sure you take financial advice before you choose this option, as otherwise it could impact your quality of life in retirement.
3. Apply for LTA protection
As the LTA was reduced to £1 million in 2016, the government created an LTA protection scheme so that larger savings pots weren’t automatically pushed over the limit. If you’re eligible, this can slightly increase your LTA. Check with an adviser to find out if this is something you can apply for.
4. Draw money in excess of the LTA as income, rather than a lump sum
It’s worth remembering that the LTA charges are designed to recoup tax relief you were given at source, rather than to have a negative overall impact on your savings.
As a result, if you draw your pension as income rather than a lump sum, you’ll only “lose” the tax relief, rather than your savings. This means you can still make use of savings held in a pension that exceeds the LTA, provided that you draw it efficiently.
5. Take financial advice
The best thing you can do in this position is to take financial advice. A financial adviser can look at your specific circumstances and work out what the best course of action would be for you.
They’ll be able to tell you whether you’re eligible for LTA protection, or if you need to employ other methods to reduce a tax liability. They’ll be able to recommend the right choices for you that make sure you’ll be able to live the kind of retirement lifestyle that you want.
Speak to us
If you’d like to find out more about how the LTA freeze might affect you, get in touch with us at Britannic Place.
Email firstname.lastname@example.org or call 01905 419890 to speak to us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.