Some savers better off saving into pension after LTA breach – LCP

Some savers are better off continuing to save into a pension even after they have breached the lifetime allowance (LTA), according to analysis by LCP.

The LTA has been in place since 2006, and sets the total amount an individual can save whilst benefiting from pension tax relief over their lifetime. The allowance level has varied, peaking at £1.8m in 2010/11, but now currently stands at just over £1m, which is in place until at least 2026 due to a five-year freeze.

LCP warned that many savers will need to factor in the LTA to their retirement planning, but there may be some scenarios where it is still worth saving into a pension, even when the LTA has been reached.

The first scenario is for employees who benefit from an employer pension contribution that would be lost if the worker opted out of pension saving; this is particularly true for those in defined benefit pensions where employer contributions can be very substantial, LCP said.

Secondly, those who pay a higher income tax rate when in work than they will pay in retirement would also be better off continuing to save into a pension. LCP explained that in some cases, the high marginal rate of tax relief on contributions will more than compensate for an LTA tax charge plus income tax in retirement, especially in the presence of an employer pension contribution.

Finally, the anomaly also applies to those earning between £100,000 and £125,140; this group face a marginal income tax rate of 60 per cent because of the gradual removal of their personal income tax allowance as their income rises; pension saving is particularly attractive for this group, LCP said.

However, the research shows that the self-employed (and others who do not benefit from an employer pension contribution) may find that if they expect to reach the LTA they should consider directing marginal savings to another vehicle such as an Investment ISA.

LCP also highlighted that all of these calculations assume that the contributions are not of a level that would be impacted by the pensions Annual Allowance.

To measure the tax treatment of additional pension savings for those who have reached the LTA, LCP compared £100 (net) of extra savings into a defined contribution pension with £100 into an ISA, assuming the same rate of investment return could be achieved in each case (and noting that both deliver gross investment returns).

As the same investment return is achieved whichever option is chosen, the analysis stripped out investment growth and looked just at tax and contribution effects. It showed how the outcome varied according to the marginal income tax rate of the saver whilst in work and what might turn out to be their income tax rate in retirement.

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