Your Expat Pension and Exceeding the Lifetime Allowance
The pensions tax relief Lifetime Allowance (LTA) limit should be an area of active concern for any expat with a high-value pension.
Despite this, far too many wealth management clients have insufficient knowledge of precisely what the LTA is and how it could affect them. In fact, significant numbers of expats may be unwittingly breaching the LTA limit and are oblivious to the possible consequences.
What is the LTA?
The Lifetime Allowance sets a limit on the amount of money that can be taken form a pension scheme – either as regular income or a lump sum – without incurring additional tax liability.
The LTA is linked to inflation so generally rises each year – for the tax year 2019/20 it is set at £1,055,000*
As such, the LTA generally only affects high-net-worth individuals or those with pensions worth in excess of £50,000. Anyone who falls into this category should be aware of the effect that the LTA could have on their expat pension as well as their retirement and legacy planning.
For example, by ceasing contributions to your plan or restructuring your finances or tax residency status, it may be possible to avoid incurring LTA penalties. Other possible strategies include
transferring a pension to a Self Invested Personal Pension (SIPP) or Qualifying Recognised Overseas Pension Scheme (QROPS). A select few may also be able to apply to HMRC for LTA ‘protection', although this is generally only offered in exceptional circumstances.
It is not possible to rectify LTA breaches retroactively; it is essential that you take action before you exceed the LTA. And the fact that the LTA is inflation-linked means that you may exceed the threshold much sooner than you are prepared for.
Furthermore, because the LTA accounts for all accrued non-state pension benefits, including investment growth and compounded interest, if you do not get your sums right it could very quickly ensnare you before you are ready.
If your pension fund exceeds the LTA, extra tax is payable on any occasion you access your money – a situation known as a "benefit crystallisation event" (BCE).
Tax charges for exceeding the Lifetime Allowance across all schemes are as follows:
- 55% for lump sums
- 25% for pension income or cash withdrawals *
Expat Pension Advice from Blacktower FM Wealth Management Specialists
Unfortunately, even expat pensions are subject to the LTA; non-UK residents are affected in the same way as those residing in the UK. This means that even residents of EU countries such as Portugal, Spain and France will have to pay UK tax on any qualifying withdrawals and this cannot be claimed back.
If you would like to consider your options when it comes to your UK pension and the LTA, speak to Blacktower FM today about the possibility of finding a suitable tax-efficient and legally compliant solution.
Blacktower FM provides personalised and regulated advice so that you can make the most of your expat pension and your long-term financial goals. For more information, contact us today.
* https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance accessed 02-05-19
The information above does not constitute advice and independent advice should be sought before making any changes to your pension planning strategy.