Our resident expert responds to a complex question from someone planning to retire abroad
Thursday 09 Jun 2022 Author: Tom Selby

I am an additional-rate (45%) taxpayer and work for a big public healthcare company.

I moved out of the employer pension in 2015 and my pensions now sit outside the country in a QROPS scheme as I plan to retire elsewhere. I also have a SIPP to which I contribute £40,000 per year.

I was auto-enrolled into the employer scheme three years ago but opted out. I have again been re-enrolled and I am considering opting out again.

Would my lifetime allowance kick in if I rejoin the employer pension? How can I keep tabs on both my UK and overseas pension so that I do not hit the lifetime allowance and incur a tax bill?

Is it better to for me to be out of my workplace pension to keep the matter less complicated?

Deepak


Tom Selby, AJ Bell Head of Retirement Policy says:

While clearly it isn’t ideal that breaching the UK lifetime allowance incurs a tax charge, there is a danger in trying to avoid it you end up doing more harm than good. This is particularly the case when considering opting out of your workplace pension scheme.

The standard lifetime allowance stands at £1,073,100 in 2022/23 and will be frozen at this level until 2025/26. Each time a ‘benefit crystallisation event’ occurs a ‘test’ will be carried out to determine how much of your lifetime allowance has been used up.

WHEN YOUR ALLOWANCE IS TESTED

Benefit crystallisation events include taking your tax-free cash, choosing a retirement income route (such as drawdown or buying an annuity), dying (if you die before age 75) or your 75th birthday.

Transferring to a QROPS, a type of overseas pension scheme, will also trigger a lifetime allowance test. Once transferred, these funds are outside the UK pensions system and will not be tested against the lifetime allowance again.

Contributing to a pension will not result in a lifetime allowance test, although you could lose lifetime allowance ‘protection’ if you have previously applied for it.

If you breach the lifetime allowance, you will pay a lifetime allowance charge of either:

– 25% if you take the excess as income (with income tax payable then on the withdrawals);

– 55% if you take the excess as a lump sum (with no income tax payable).

You can read more about the mechanics of the lifetime allowance here

Your yearly total pension contributions for tax relief are capped at £40,000 by the ‘annual allowance’, while personal contributions cannot exceed 100% of your earnings.

Very high earners are also affected by the annual allowance taper, which can reduce their annual allowance from £40,000 to as low as £4,000.

As you are an additional-rate taxpayer it’s worth double checking you aren’t caught by this – if you are you may have to pay an annual allowance charge on your £40,000 SIPP contribution.

You can read more about how the annual allowance taper works here

Usually, it makes sense to stay in your workplace pension scheme because you benefit from employer contributions as well as upfront tax relief. Even if you breach your lifetime allowance, the value of these employer contributions mean it can be worth taking the charge.

GENEROUS EMPLOYER CONTRIBUTIONS

Under auto-enrolment there are minimums you and your employer have to pay in, but many employers are more generous.

Take, for example, someone who is already over the lifetime allowance and contributes £800 to their workplace pension scheme.

It is boosted to £1,000 in their pension by upfront tax relief, but thanks to their generous employer also qualifies for a 100% match.

So, their £800 contribution has, through the employer match and tax relief, been turned into £2,000 in their pension scheme.

Even if that £2,000 is hit with a lifetime allowance charge, they will still have £900 if they withdraw it as a lump sum and pay a 55% charge, or £1,500 if it is left in the pension and they pay a 25% charge. Either way, it is financially beneficial to go over the lifetime allowance in these circumstances.

Similarly, if your investments grow and you breach the lifetime allowance, you would still be better off versus holding all your pension in cash earning 0% interest and not breaching the lifetime allowance.

Once you have maxed out your workplace contributions that qualify for an employer match, more flexible options like SIPPs can be attractive for additional retirement savings.

WORTH SEEKING ADVICE

If your fund value is above your lifetime allowance you should consider other tax incentivised vehicles like ISAs for savings over and above those that qualify for a matched employer contribution.

In terms of keeping tabs on your pensions, your schemes should be able to provide you with up-to-date valuations.

One final (and perhaps obvious) point – the lifetime allowance, annual allowance and overseas pensions can be really complicated. I’d strongly recommend seeking specialist regulated advice about your personal circumstances before making any decisions.


DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not
provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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