Approaching the lifetime allowance can be concerning when planning for retirement, and you might be looking for the best solutions to continue protecting and building your wealth effectively.
This article takes you through what the lifetime allowance is, as well as what you should do when approaching it – including financial planning, as well as seeking advice from a modern UK wealth management service.
Read on to give yourself the best chance of a successful financial outcome when you retire.
What is the lifetime allowance?
The lifetime allowance is the total sum of money your pension pot can reach, while still being sheltered from tax. Any funds that exceed this specified limit can have additional tax charges applied.
As of the current tax year 2022/2023, the lifetime allowance stands at £1,073,100. The allowance applies to your pensions savings across your entire lifetime, as opposed to periodic allowances like your pension annual allowance – which is £40,000 as of the current tax year.
The lifetime allowance not only includes your pension contributions, but also takes into account any defined benefit schemes, as well as investment growth within your pension pot.
Should you end up accruing more funds in your pension pot than the allowance specifies, the tax rate you’ll be charged at will vary, depending on how you choose to receive your money.
If you opt to receive your pension as a lump sum, you’ll be taxed at a rate of 55%. However, if you receive your money through other ways – such as cash withdrawals or pension payments, for instance – the tax charge is 25%.
What should you do when you’re approaching your lifetime allowance?
If you’re approaching your lifetime allowance, or even if you simply want to plan ahead early, there’s a few things you can do to protect your wealth for retirement:
- Seek advice from a wealth manager
If you want to manage your lifetime allowance effectively, one of the best ways is to seek advice from a wealth manager.
A financial adviser can give you beneficial guidance on how to intelligently approach your lifetime allowance, taking into account your current financial circumstances, and how much you’ve accumulated in your pension pot so far.
Their expert advice will ensure you can continue sheltering as much of your money from tax as possible, and even if you exceed your lifetime allowance, they’ll advise on the most efficient approach to building your wealth for retirement.
- Create a financial plan
Creating a financial plan for your retirement enables you to lay out your current financial circumstances – including your pension pot sum, what your retirement goals are, and how you can reach them.
This way, you can begin implementing the right steps to take your current wealth and build it efficiently. Your adviser can ensure these steps are not only achievable, but well-suited to keep your funds as sheltered from tax as possible, and making the most of your lifetime allowance.
- Diversify your tax wrapper investments
You can also start diversifying your investments using tax wrappers, if you’re close to exceeding your lifetime allowance.
Your pension pot is only one of many tax wrappers you can benefit from when approaching retirement.
For example, consider investing your savings in an individual savings account (ISA). This is another tax wrapper that shelters a certain sum of money from tax each year. As of the current tax year, the annual ISA allowance is £20,000 per person, or £40,000 for a couple.
Therefore, as you approach your lifetime allowance, you can begin investing some of your savings in various other tax wrappers, to help you avoid going over your pension pot’s lifetime allowance.
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You no longer need to feel overwhelmed if you’re approaching your lifetime allowance. Simply seek expert advice from a wealth manager to begin structuring your retirement finances in the most tax-efficient manner.
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Please note, the value of your investments can go down as well as up.
