The standard LTA was frozen from 2020/21 and remains at £1,073,100 (2021/22); the chancellor has frozen this until 2025/26 tax year. This prolonged period with no increases will mean that more and more people may face LTA charges.
It is important to note that the LTA is not a ‘ceiling’ on what can be saved into pensions and there are many good reasons why those potentially affected should continue saving into their pension in the new tax year, particularly if stopping means losing out on Employer contributions into their workplace pensions – it is worth noting here that Death in Service benefits could also be lost as this can be linked to membership of an Employer pension scheme.
The basic rule is that people should only give up saving into their pension if there is a better alternative and the key questions, they should ask themselves are:
- Is the LTA charge a price worth paying?
- Should they give up their employer pension contributions? Many employers offer matching contributions so they may be giving up some of their remuneration package.
- Does carrying on paying matching contributions make sense?
- If their employer offers extra salary in exchange for pension contributions, will they be better off?
- Should they stop paying into their pension if this will lead to a tax charge on savings in excess of the LTA?
To make an informed decision, do some calculations. By making pension contributions via salary sacrifice you could save both Income Tax and National Insurance whilst building up a pot of pension savings. If retirement benefits are taken via Flexi-Access Drawdown, a basic rate taxpayer would pay the 25% LTA charge and 20% income tax on the amount they received. Even with the LTA charge, a pension contribution via salary sacrifice could mean you receive more than having the additional salary.
It is also important to remember that we don’t know how the LTA could change as future Governments come into power, there is nothing to say the LTA couldn’t be increased in the future and by stopping pension contributions now could be a real disadvantage in the future.