Pensions values are taxed when they exceed the allowance introduced in 2006 called “The Lifetime Allowance”.
Exceeding the Lifetime Allowance carries a tax penalty of 55%, and the number of people reaching the lifetime allowance has more than doubled in the last 4 years.
This can be seen as a penalty for those who have achieved good investment growth over the life of their pension and for those who have saved frugally. This leads to a dis-incentive to saving into a pension above the lifetime allowance, it also penalizes those who want to move out of large Final Salary scheme to a Money Purchase scheme and are almost at or at the lifetime allowance limit.
In addition, many employees are members of their company group death in service scheme. Unwittingly, they may put themselves over the Lifetime Allowance on death, as these schemes are held under HMRC pension rules. This means that any pay out will be added to an individuals pension fund which could mean that if they have a high value in pensions, some of the death in service payment could be taxed at 55%.
It is important to create a strategy to maximise pension benefits whilst being mindful of the penalties for over-funding. Therefore, having a strategy that maximises tax relief from pensions and other tax schemes is vital to ensure the “tax take” from HMRC is minimised and investment values maximised.
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