On 14 May we held our Pension Question Time event at the Jaguar Experience in Birmingham. Our panel of pension experts spent several hours fielding pension and retirement questions from the audience. Here we have highlighted a few of our favourite questions and answers from the evening.
At what point do you start paying tax if you exceed the lifetime allowance?
Under current legislation if you haven’t touched your pension, and you haven’t reached age 75 or died, then nothing will happen if you go over the allowance. If you start to take money from your pension – what is known as ‘crystallisation’ – then the part of your pension that you crystallised will be tested against the lifetime allowance and you may need to pay tax on any excess when you take the money.
However you may want to address the various options for protecting your pension if you think your pension is growing at such a rate that it’s going to breach the allowance in the future.
What happens if you don’t take your tax-free cash?
If you don’t take your 25% tax-free cash before age 75, and then you died after age 75, your beneficiaries or whoever you’ve nominated wouldn’t get the option to take the tax-free cash.
How are pensions measured against the lifetime allowance?
It depends on how your pensions are made up. If you have a defined contribution or money purchase pension, where your pension is a fund that has a specific value, the lifetime allowance test is against this value. But if you’re in a final salary pension such as a teacher’s pension, then you need to multiply the pension’s annual income by 20 and measure this against the lifetime allowance.
If I move abroad, should I move my pension or keep it here?
That comes down to where you’re living, whether you’re already taking your pension, what the currency exchange risks are, and what’s available for you to do. One of the most important issues is currency risk – a lot of people underestimate it.
It hasn't been uncommon to see British people living in France drawing money for their income, and when the exchange rates went against them, suddenly they couldn’t afford to live because they were essentially still trading in pounds but living in euros – and it was a huge issue.
Are there any points at which you pay tax when paying into your pension, or is it only when you take the money out?
You will need to pay tax if your pension contributions exceed the annual allowance in any year. But you won’t pay any lifetime allowance tax charges until you start taking money out of your pension, you reach age 75 or you die.
What is the likely effect on annuity rates if bank interest rates ever go up?
Annuity rates are linked to long-dated UK Government bond (or gilt) yields, rather than high street bank rates. Long-dated gilts drive up or down the cost of providing the guaranteed income to the annuity provider. So if gilt rates are low, annuity rates are also likely to be low and vice versa.
Bank interest rates would affect short-dated gilt yields, whereas long-dated gilt yields are more influenced by expectations for things like future inflation and long-term growth in the economy.
I’m in my 70s and am still working part-time. My annual salary is less than £40,000, but I’ve received an inheritance that I’d like to invest. Can I still make use of carry forward if I’m on a low income at this stage in life?
Even when using carry forward, your annual pension contributions are still capped by your annual earnings. So if you’ve got part-time employment income of £20,000 a year then you will be restricted to this amount when paying into your pension. You could still use carry forward if your employer was willing to contribute for you, but if you haven’t then that’s not the case. However you could also look at maximising your ISA allowance, which is £20,000 at the moment.
Do you have any questions about your pensions?
If you have any questions about pensions or retirement planning, please book a telephone pension consultation with our pension experts. They will be able to give you more information. Simply complete this short form, call us on 020 7189 2400 or email email@example.com.
This article was previously published on Tilney prior to the launch of Evelyn Partners.