What is the lifetime allowance and how can it impact me?

When planning for your retirement, one of the most important things to consider is the lifetime allowance, and how you incorporate this into your approach.


What is the lifetime allowance

In this article, you’ll learn what the lifetime allowance is and how it can impact your journey to retirement, as well as some tips ranging from diversifying your investments to the benefits of consulting a modern wealth manager.

What is the lifetime allowance?

The lifetime allowance is the total amount of money you can save in your pension over your lifetime, without having any additional tax charges applied.

The lifetime allowance factors in your pension contributions, defined benefit schemes, and any investment growth that adds to your pension pot.

As of the current tax year 2022/2023, the lifetime allowance is £1,073,100.

How can the lifetime allowance impact you?

It’s essential to manage your lifetime allowance when planning for retirement, since it allows you to build your wealth tax efficiently, minimising the loss of funds to tax charges.

Your lifetime allowance could help dictate how you structure your contributions, as the tax charges applied to your pension once you exceed this limit can significantly affect your pension pot.

The tax you’ll be charged on your pension after you surpass your lifetime allowance will depend on how your pension funds are paid to you:

  • If you receive your money as a lump sum, you’re taxed at a rate of 55%.
  • If you receive your money though alternative methods, such as pension payments or cash withdrawals, for example, you are taxed at a rate of 25%.

Therefore, you can see why addressing your lifetime allowance in your pension plan is crucial, since it can help you avoid the significant impact of tax charges on your lifetime savings.

How can you make the most of your lifetime allowance?

There are many ways you can approach your lifetime allowance to ensure the most successful financial outcome when you reach retirement. For instance:

  • Seek a wealth management service

One of the most important things you can do when tackling any financial challenges, especially your retirement, is to seek a wealth management service.

An expert adviser will help you establish the best approach towards your pension contributions, taking into account your current financial circumstances, as well as your retirement goals, to ensure you make the right contributions to build your pension pot tax-efficiently, and achieve a successful financial outcome.

  • Diversify your investments

Another way to make the most of your lifetime allowance is to diversify your investments. Contributing to your pension is not the only way you can shelter your savings from tax, and other investment types can prove beneficial for increasing your tax-free savings.

For instance, you could consider the benefits of individual savings accounts (ISAs), which allow you to save a certain amount of money each year that’s sheltered from tax. As of the current tax year, your ISA allowance is £20,000.

This enables you to save more money, without bringing your pension pot any closer to your lifetime allowance.

  • Financial planning tools

You should also consider online financial planning tools, such as these: www.netwealth.com/financialplanning#planningtools, which can help you outline the best approach to building your retirement fund.

Your wealth manager may also be able to give you access to a variety of expert tools, such as a lifetime allowance calculator, for example.

This can help you evaluate how much of a tax charge you might incur. It accounts for numerous variables (including retirement age, current pension value, contributions) and calculates how much over the lifetime allowance you may go, before breaking down what you could owe under various taxation scenarios.

Now you know what the lifetime allowance is and how essential it is to your retirement, contact your wealth manager now to start creating the most effective plan to build your wealth for retirement.

Please note, the value of your investments can go down as well as up.



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