Living in Spain
5 things you should know about the UK Lifetime Allowance (LTA).
What is the Lifetime Allowance (LTA)? Well, a lifetime of saving can mean reaching the Lifetime Allowance by having a UK pension with a capital value of £1,000,000 at the time of drawing your last pension. If you are in a final salary scheme a pension of £40,000 pa (with no other UK pension) could take you to the limit. If you have more in the pension pot than the LTA, then anything over that will be taxed at a LTA rate of tax of 55% if taken as a lump sum and 25% if taken as income. This is an EXTRA tax in addition to any income tax that you may have to pay on the pension in the UK and Spain.
The good news is that with careful planning you probably do not need to pay this tax. So here are 5 top tips to help you plan so that you do not have to pay this tax.
- The LTA is going down. At its height it was £1.8 M but it is £1.0 M from 6th April 2016. Any capital value above this will be subject to the LTA tax as well as any tax here in Spain. You should review your pensions and do an assessment against the new LTA now before the allowance goes down further.
- The most critical date for a LTA calculation is the date of your last pension plan being taken or your 75th birthday. Indeed, the calculation can be done several times. It is the LAST calculation which is the most critical one, so you need to include all your pensions in the calculations. We often hear people say “Oh, I have a very small pension with my old company but it is so small we won’t worry about that one”. However, for the purposes of LTA it is important to include it. Here is an example of why it is important:
You retire at say 55. You have a company pension, a personal pension and a “small pension”. You draw your pension from your index linked company pension and use a drawdown facility for your personal pension. You do the LTA calculation at age 55 and think that is it. You have done your calculation and have included the capital value of the small pension. As it is small you do not bother to take the small one.
At 75 your small pension is compulsorily paid out. Another LTA calculation is required at this point. The calculation is now based on your pensions at 75. This includes 20 years of indexation and also 20 years of growth on your personal pension. Suddenly, you find that the increase in value of your main pensions together with the small pension triggering another LTA calculation has left you with a tax bill based upon all your pensions. Ouch!!
- You might still be a youngster, a spring chicken, but you can be caught out by the LTA even at your age. The same principal as in the above example applies if you have not yet reached retirement. If your pension pot grows at 6% per annum here are the ages and amounts of pension that can put you over the limit retiring at age 65. And this is without adding further contributions!!!
Age Now Pension Value Now in GBP 40 247,000 45 329,000 50 438,000 55 592,000 60 790,000
- When else is a LTA calculation necessary? When withdrawing your pension under the Pension Freedoms introduced in the 2015 budget a LTA calculation is required. We strongly recommend doing this calculation BEFORE you start the process of taking your money out from your pension. If you are moving your pension to an overseas pension, a calculation is required. The other occasion when a LTA calculation is required is in the event of death with a pension where benefits are not being taken. In the example in section 2, substitute death for age 75 and the same issue occurs.
- The good news is that there are several strategies to remove the possibility of the LTA tax. You can do something about it. What you do will depend on your precise personal circumstances, your style of UK pension (there are 11 types of UK pensions), your health, what you would like to leave for your children and more. A personal assessment of your situation is essential and particularly so as we live in Spain. Any adviser must be up to date with UK legislation, up to date with UK tax, up to date on Spanish tax AND the interaction between British and Spanish tax.
Living in Spain, it is natural to assume (indeed convenient) that UK taxes are no longer of interest to us. However, if you have just at least one remaining UK pension that you are not taking benefits from, you should ask for a review from a suitably qualified and experienced financial planner.