Retirement planning can be a complex process, especially when addressing all the potential tax charges and rules that may apply to you.
To better protect and grow your wealth effectively, it’s important to understand how these aspects of your pension work – one in particular, being your pension lifetime allowance.
This article will guide you through what the pension lifetime allowance is, explain how it could affect you, and show how services like modern wealth management and financial planning can help you navigate it.
What is the pension lifetime allowance?
The pension lifetime allowance is a specific limit on your pension pot, whereby you’re only allowed to accumulate a certain amount in your lifetime, while still having your money sheltered from tax.
As of the current tax year, 2022/2023, the pension lifetime allowance is £1,073,100. This means any savings within your pension pot under this amount will be sheltered from tax, and any savings which exceed this limit can have potential tax charges applied.
This lifetime allowance is considered in conjunction with the pension annual allowance, a yearly limit on how much you can contribute each year, tax free. Currently, this is set at £40,000.
How can this affect your finances?
When structuring your pension contributions, if you remain under the allowance your money is sheltered from tax. This is essential for building your wealth efficiently for retirement.
However, exceeding the allowance means your money is impacted by tax charges. The tax charges on your pension will vary depending on how your pension funds are paid to you:
- If you receive your funds as a lump sum, you’re taxed at a rate of 55 per cent.
- If you receive your funds though alternative methods, like pension payments or cash withdrawals, you’re taxed at a rate of 25 per cent.
The lifetime allowance has the potential to significantly impact your pension fund, which is why it’s so crucial to manage it effectively.
How can you best navigate the lifetime allowance?
There are a variety of things to consider to help you make the most of your lifetime allowance, and protect your wealth for retirement. They include:
Seeking financial advice
One of the most crucial things to do when managing your pension lifetime allowance is to seek the expert advice of a modern wealth manager.
Your adviser will have extensive knowledge surrounding your applicable tax charges, and will also take into account any personal concerns or challenges you’re facing with your retirement.
This way, they can offer you a unique approach to your pension savings that’s tailored to your individual financial circumstances, so you can make the most of your allowances and build your wealth effectively.
Create a financial plan
Another important thing to do is to create a financial plan. Once again, financial planning is best executed when guided by your expert adviser. They’ll help you establish a set of financial goals for your retirement, which are both beneficial for your wealth and achievable in terms of your circumstances.
They can then help you make the right pension contributions so that as much of your money is sheltered from tax as possible, and your contributions are structured in a way that best aligns with your goals.
With all the complexities surrounding your pension allowances, it’s essential you contact your modern wealth manager now.
This will not only give you the best approach to growing your retirement fund, but will also help you achieve the most successful financial outcome for all your goals.
Please note, the value of your investments can go down as well as up.
