The Lifetime Allowance: Making Alternative Plans For Retirement

The Lifetime Allowance was introduced five years ago, and most of us thought that it was only ever going to affect the wealthiest in the land. However, we may all have been wrong. The level of the Lifetime Allowance has fallen steadily, and the latest reductions - that comes into effect this week – will see thousands more people discovering that they may have to rethink their pension plans.

So it could be a good time for you to look at some alternative tax allowances to maintain asset values.

What is the Lifetime Allowance?

The government needs us to save for retirement. So, saving into a pension attracts tax relief. However, it was argued that very wealthy people were enjoying far too much tax relief by building enormous pensions – and so a Lifetime Allowance was introduced. The cap in the 2011/12 tax year was £1.8m, and it has been falling ever since. In future the maximum you can save into your pension is £1 million.

That sounds a generous sum – but it is not as generous as you might think. When first introduced, the Lifetime Allowance used to apply only to the top few thousand high earners in the UK with seven figure pension pots. But the reduction has now pushed hundreds of thousands of people into the net.

Savers will pay tax on any excess savings above the Lifetime Allowance limit. The rate of tax depends on how savers receive the excess. If it is in the form of a lump sum, then the rate of tax is an eye-watering 55%. If it is in the form of a regular pension, the excess is taxed at 25%.

World coins in glass savings jar with retirement plan labelWhat can you do?

If your pension pot is full, you need to make alternative investments if you want to enjoy the kind of retirement you planned.

You should certainly think about making full use of the revised ISA allowance - £20,000 per year – to build up a tax free lump sum in parallel to your pension. But there are other investments that you could consider – including the Enterprise Investment Scheme– or EIS.

The Enterprise Investment Scheme – and you

The scheme offers investors incentives for investing in small, high-risk companies, and properly used, it can make a substantial difference to your tax position. It lets you invest in small businesses while enjoying tax breaks whether or not the company and your investment is a success. These include Income Tax relief proportional to the cost of the shares purchased through the scheme, and if you make a loss when you sell EIS shares, you can claim loss relief – further cutting your tax bill.

EIS tax benefits at a glance

  • Income Tax Relief – You can invest up to £1,000,000 obtain a tax reducer of 30% of the amount invested. Dividends received are not subject to Income Tax.
  • Loss Relief - If you dispose of shares at a loss, you can set the amount of the loss, less any Income Tax relief against Income Tax or against any capital gains
  • Capital Gains Tax Exemption – if you have received Income Tax relief on the cost of the shares, and the shares disposed of after at least three years, any capital gain on the disposal of the EIS shares will be exempt from Capital Gains Tax.
  • Capital Gains Tax Deferral - Capital gains realised on the sale of any asset may be deferred against investments in an EIS scheme; the gains crystallise when the EIS investment is disposed of.

Is it for you?

EIS may be suitable for experienced investors who need tax-efficient solutions. To find out more about how it could help you grow your personal wealth, it makes sense to get professional advice. To find out more about EIS or any other kind of investment and to discuss their suitability for your particular circumstances, contact our expert team.

If you're unsure about how to save for your retirement, contact our pension team today.

'Click here to read our recent blog "The Guide To New State Pension."

EIS may be suitable for experienced investors who need tax-efficient solutions, but you should remember that these are high risk investments.

The Financial Conduct Authority does not regulate taxation and trust advice.

Levels and bases of reliefs from taxation are subject to change.

The value of investments can go down as well as up and you may not get back the amount invested.