Pensions are offered to senior or retired citizens in most countries. Every country has its unique tax laws on pensions. But then what most people need to gain insights on is the method to reduce tax on their pension. There are many possible ways to do so. If you are a resident of the United Kingdom and looking for the same then this blog will be an answer to all your queries.
What is a Pension Lifetime Allowance?
Regarding pensions, lifetime allowance is the overall tax limit that is privileged on pension funds. This is something a person can accrue in his lifetimes before the lifetime allowance charge is applicable. Currently, for 2021-2022, the standard lifetime allowance is 1,073,100 euro. Some of the things that you may need to know about life allowance are listed below:
- There is as such no limit on the benefits that an individual can receive via the registered pension schemes. But then there is a limit on the tax-privileged pension funds that an individual can collect during a lifetime.
- If a member avails certain benefits at times then the amount of lifetime tax allowance they used is tested.
After the person has availed the benefits along with other benefits then a lifetime allowance charge is applicable to the excess of lifetime tax allowance.
So this is what the pension lifetime allowance is all about.
What Do You Understand About The Lifetime Allowance Tax Charge?
The lifetime allowance is the money or amount that is present in your pension before you pay a tax charge. The lifetime tax rate depends on the way you withdraw your money via pensions. The applicable tax charge is mentioned below:
- A 25% tax charge is applicable if you withdraw money as an income. This means that you buy an annuity or withdraw the amount as a regular income with the help of a drawdown.
- A 50% of the tax charge amounts are applicable if you take the amount in a lump sum. This means that you take out the amount in the form of an uncrystallized fund.
These are the tax charges that apply to your lifetime pension allowance. Any of the two charges are equally applicable and depend on the way you access your benefits on a lifetime allowance.
Measures to Reduce Tax on Pension
Many ways can help reduce the tax on your lifetime pension allowance. Some of them are:
- Make use of ISA instead of contributing to a defined contribution pension. This will prevent you from any charges.
- You can consider redirecting your contributions into the pension of your spouse, instead of redirecting them in your pension.
- Keep a check if you have got any protections. Because the government offered some protections before reducing the lifetime tax allowance. This was done to allow certain people to avail themselves and keep the older and higher lifetime allowance tax.
These are some measures that you can consider to reduce the tax on your pension. You will surely benefit from them.
How to Claim The Pension Tax Relief?
There are certain ways via which you can claim your pension tax relief. Some of these methods are highlighted below. Have a look at them:
- Pension Tax relief at source: All the personal and even some of the workplace pension offer a pension tax relief at source. According to this the person who provides you the pension makes a request to HMRC to add back the tax rate that you otherwise would have been paid directly to your pension.
- Pension Tax Relief from the Net Pay: This option is also offered in many workplaces. Under this arrangement, you will receive a full tax relief upon your pension without having to do anything extra.
So these were all the advice that you can consider to reduce the tax on your pension.
Of course, paying taxes is the responsibility of every individual. But at the same time, you can benefit yourself by taking help and advice from a financial advisor to reduce the tax on your pensions. This will help you a lot in your financial life. So as an individual you must consider them and avail benefits from these tips.
