'How will my pension pot be taxed now the LTA has been abolished?' Jasmine Birtles replies
Jasmine Birtles looked at the pensions lifetime allowance (LTA) in this week's Q&A
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Jasmine Birtles is answering pensions and retirement questions in an exclusive Q&A for GB News members. Email money@gbnews.uk to submit your query.
Question: "I used my full Lifetime Allowance and took the 25 per cent tax-free lump sum under the original company scheme, leaving a small pension pot of approximately £13,000 in the new scheme which remains invested and untouched.
"Although the LTA has now been abolished, am I right in thinking that I can't withdraw anything from the second pension pot without it being taxed as income?
"My company and state pensions just reached the threshold for higher rate tax so presumably this means that I would effectively lose 40 per cent of the £13,000. Is there any way of avoiding this other than leaving it where it is ad infinitum?"
Jasmine replies: Yes, you’re right that the abolition of the Lifetime Allowance is unlikely to affect the tax-free cash you can access if you have used up your full 25 per cent entitlement.
According to Gianpaolo Mantini, Partner at Saltus, “a new allowance limits how much tax-free cash (TFC) overall an individual can receive".
A pension saver has asked for some guidance after the lifetime allowance was abolished
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He explained: "This is called the ‘lump sum allowance’ (LSA) and caps tax-free cash at £268,275 or 25 per cent of the previous LTA.
"However, you suggest that this may be a defined benefit scheme which calculates TFC differently and it may be that the 25 per cent doesn’t match the new fixed LSA amount.
"It could be that you can still access the TFC within the small pot. You should review the amount of TFC received at retirement and if it was below £268,275, you can access the TFC within the smaller scheme up to the new LSA limit.”
As you say, a straightforward option is simply to do nothing. After all, you can pass on your pension to your inheritors free of inheritance tax (though possibly subject to the marginal rate of income tax to the recipients).
If you take income from the pensions you will be bringing the money into your estate, as well as the income being taxed at your marginal rate.
This could have implications on inheritance tax for your family and friends.
Mantini adds to this idea that “if you are married/in a civil partnership, from a tax position, it could be better to leave the pension until your death and if the surviving partner is a lower overall earner, they will pay less tax.
"Do ensure your expression of wish form is completed with the pension provider to ensure your money can be passed on to your chosen beneficiary(s) with ease.”
There may be other options for you to consider, though.
I’m not sure from your question what the nature of your assets is.
If the regular income you are taking from your company pension is being drawn from a Defined Contribution (DC) scheme rather than the Defined Benefit (DB), as I’m assuming, then you have control over how you take this income.
In this context, pausing some of your income from one pension pot to draw your £13,000 from the other should be straightforward and a good way of reducing tax payments
READ MORE:
State pension payments can be stopped, but only once over the course of retirement
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I’m assuming your company pension is a DB one (well done!), that provides you with a regular income alongside your state pension.
Depending on the scheme, you may well be able to pause your final salary payments.
You could then draw the remaining £13,000 from your Direct Contribution (DC) pension to supplement your income.
That would give you a regular income and keep you under the higher rate threshold at the same time.
The same option is available to you with your state pension although you can only stop receiving your state pension once over the course of your retirement.
Jasmine Birtles is a personal finance expert, TV and radio presenter and author of 38 books. Her website, MoneyMagpie.com, covers all aspects of personal finance from money-saving and money-making ideas to investment and pensions information. She is a keynote speaker at conferences around the world.