If only Victor Meldrew had planned his retirement income before he became a grumpy old man, with one foot in the grave! By Julie Sebastianelli, Wealth Management Director at Mattioli Woods

When you have spent a lifetime dreaming of enjoying your retirement, safe in the knowledge you have enough put aside in your pension, the last thing you want is to be hit with an unexpected tax charge as you turn age 75. Never rest on your laurels; changes happen and sleepwalking through them might cost you dear.

In 2015, new pension ‘freedom rules’ provided greater flexibility in terms of payment and accessibility. At the same time, there was a widening of the scope of beneficiaries to whom the passing of undrawn funds could be made free of inheritance tax (IHT).

The favourable IHT position pensions enjoy has seen an increase in clients using their personal wealth to fund their lifestyle, and to reduce their taxable estate on death. In this scenario, clients prefer to view their personal pension pots as ‘next generation’ monies.     

However, you need to be mindful you are not caught by a lifetime allowance (LTA) tax charge. The LTA is the total amount you can build up in all your pension savings without incurring a tax charge. Any excess could be taxed at 25% and potentially up to 55%. The standard allowance for the current tax year (and until April 2026) is £1,073,100. 

You will not use any of your LTA until you start taking benefits from your pension arrangements. When this happens, it is known as a benefit crystallisation event (BCE) and at each event your pension is tested against the LTA to see whether an LTA tax charge is due. All final salary and money purchase pensions are included.

At age 75, money purchase pensions are tested again against their LTA, whether they have been crystallised or not, creating a nasty surprise for some. 

It is possible to maintain the LTA at a higher level through one of the protections that have been available. This is still an essential planning tool for individuals who have, or may have, pension savings in excess of the LTA. There are two LTA protections currently still available: fixed protection 2016 (FP16) and individual protection 2016 (IP16). Each type protects the LTA at or up to £1.25 million but with different considerations and conditions. This is where expert advice can be most valuable.

Protecting the LTA does not mean you can avoid the LTA charge, as any BCE at a time when the fund is over the appropriate LTA limit will trigger a tax charge. 

The below example shows how important advice is, as pensions now have greater flexibility and with that comes greater choices for individuals. It is not a straightforward decision to leave the pension untouched in the knowledge that an LTA charge may be lurking. At Mattioli Woods, we can help you with your retirement plans. Even though retirement may be some years away it is never too early to plan. Then you may not have to utter those words ‘I don’t bel…!'

Julie Sebastianelli, Wealth Management Director, Mattioli Woods

E: Julie.sebastianelli@mattioliwoods.com

T: 020 8936 3970

Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority