From young people managing their finances to adult workers planning life after employment, we all want to save enough money for retirement.
Recent changes have taken place for those who are currently saving towards their retirement. In this post we explain the changes to the lifetime allowances and how the Lifetime ISA could affect your retirement planning.
Reduction In The Lifetime Allowance
People saving from a young age will most likely have a lump sum in their pension pot. Savings are taxed if the pension pot exceeds the lifetime allowance.
From 2016/17 the lifetime allowance reduced to £1 million – previously £1.25 million.
What counts towards the allowance depends on the type of pension pot/scheme you’re in.
For example for defined contribution schemes all the money in the pot goes (however you decide to take it) counts towards your lifetime allowance.
If you go above your lifetime allowance, the following tax rates will be paid depending on how you access your pension savings:
55% for lump sum withdrawals
25% if you leave it in the pension (but subject to income tax when you draw it).
Lifetime Allowance Protection
Individuals can apply for ‘fixed protection 2016’ which protects their Lifetime allowance at £1.25 million. However you can only do this if you haven’t contributed to any pension arrangement since the start of the tax year (6 April 2016) noting any future pension contributions will see this protection revoked.
You can now apply for fixed protection 2016 online , if you pension benefits exceed £1.25 million there are some other forms of protection available which we would be delighted to discuss with you.
The Lifetime ISA (LISA) will be available from April 2017; allowing people between the age of 18-40 to save for their retirement or to buy their first home (up to £450,000). Individuals can save up to £4,000 per year and receive a government bonus of 25% - up to £1,000.
If not used to buy a first home savings in a LISA can be used as retirement income; however there are a few things to consider before setting up an account:
to avoid penalties savings should be left in the LISA until age 60, then they can be taken out at any point tax-free after this age
savings can be withdrawn at any time before you’re 60 but this will incur a 5% charge and the loss of the 25% government bonus plus all gains made on the bonus
money can be transferred from a Help to Buy ISA to a LISA, however the bonus will only apply to one account.