Then a sudden change of government policy throws an ill-timed spanner in the works, and it turns out that you have saved too much for your retirement, and maybe forced to pay for the privilege. It sounds crazy, but it really could be the case.
Pensions Lifetime Allowance
In effect, the lifetime allowance (LTA) for pensions is a limit on the ‘tax-privileged’ value of pay-outs from your pension scheme. Currently the limit is set at £1,073,100 – any pension income taken above that amount, be it a lump sum or in regular pension payments, will incur a sizeable tax charge. Normally we would expect the LTA to increase incrementally with each successive budget, but this year Chancellor of the Exchequer Rishi Sunak, the man in control of the UK purse strings, has decided to freeze the LTA at its current level until 2026. If you were considering retiring in the next few years, this could have huge ramifications on your tax liability.
Am I affected?
To work out whether you will be affected or not by the LTA you first need to understand what type of pension you have – a Defined Contribution (DC) or a Defined Benefit (DB) pension. Defined Contribution pensions are personal pension ‘pots’ into which you and perhaps your employer have been paying. The sum of your payments, tax relief and investment growth make up the total of your pension pot. When your DC pension is paid out, transferred to a Recognised Overseas Pension Scheme (ROPS), or moved to provide a retirement income, the value of your pot is tested against the Lifetime Allowance. If you exceed 100% of the LTA you are subject to tax.
Defined Benefit schemes such as ‘final salary’ pensions provide you with a guaranteed income on retirement depending on how long you were a member of the scheme and the salary you earned during that time. In order to calculate a DB scheme, you would multiply your expected annual pension by 20 and compare that figure against the LTA. Again, any amount over the LTA limit will be subject to tax.
What are the charges?
Depending on whether you receive the money from your pension as a lump sum or as part of regular retirement income you will be taxed differently. Any amount over your lifetime allowance that you take as a lump sum is taxed at 55%. Your pension scheme administrator should deduct the tax and pay it over to HMRC, paying the balance to you. If you are taking your pension as a regular income, any amount over the LTA is taxed at 25%. Unfortunately, these charges apply even if you are no longer resident in the UK. Where residents of Portugal would normally be protected by the double tax agreement between the two countries, this does not cover any amount over the LTA limit and the tax is claimed automatically by the UK. One small ray of sunshine worth mentioning is that your state pension does not count towards your LTA.
What are my options?
As ever, with delicate matters such as these, it’s best to take qualified, regulated advice from a financial advisor. It could be that by transferring your fund to a Qualifying Recognised Overseas Pension Scheme (QROPS), while you are still under the LTA limit, you will be protected from further penalties in the future, regardless of how large your fund grows. However, transferring your fund if you are already in excess of the limit would incur an immediate charge of 25%.
The best course of action is to be proactive, and seek out advice before the LTA becomes an issue for you. Get in touch and find out what can be done according to your specific set of circumstances, and safeguard your retirement fund from punitive and unnecessary charges.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, independent advice on securing your financial future. Get in touch with us on (+351) 289 355 685 or email us at firstname.lastname@example.org.
The above information was correct at the time of preparation and does not constitute investment advice. You should seek advice from a professional adviser before embarking on any financial planning activity.