In part two of our series on pensions, Kay Ingram, director of public policy at LEBC examines the lifetime allowance and the taxation of pension benefits at the point of and during retirement
The pensions simplification legislation was designed to make the taxation of pension benefits simpler. A decade later, we have a more complex regime than before 2006 with many traps for the unwary both at and in retirement when an individual’s pension benefits are measured against the lifetime allowance (LTA).
A common misconception is that the tax charge triggers once the pension values accrued exceed the allowance of £1m or the higher protected amount, if applicable. Instead, tax is only payable when the taxpayer has cumulatively used up 100% of the allowance, tested at each crystallisation event.
The LTA will be CPI linked from 2018/19. The tax charge on any excess is a one off payment but the same pension funds can be tested more than once during a lifetime and apart from the 25% tax free lump sum all income withdrawn is subject to income tax at the taxpayer’s marginal rate.
