I’m in my late 30s and have £600,000 in my defined contribution pension pot provided by my employer. I have done this by maximising the annual contribution limit (currently £40,000 subject to tapering) over the last six years.

Given that the lifetime allowance is currently £1,073,100 I’m thinking that I have potentially put too much in. For any money over the lifetime allowance, I might have to pay a lot of tax on the way out.

Is it worth reducing my monthly contributions to only take advantage of my company match rather than utilising the full annual contribution limit (£40,000)? Maybe it’s worth focusing on pre-retirement investments like ISAs, Lifetime ISAs or VCTs?

Anonymous

Tom Selby, AJ Bell Senior Analyst says:

The first thing to note about the lifetime allowance is that, under current rules, it rises each year in line with consumer prices index inflation. For anyone with a fund close to the lifetime allowance who has stopped contributing, as long as your funds don’t grow faster than CPI then you shouldn’t go over the limit.

You can read more detail on the workings of the lifetime allowance here. 

If you go over the lifetime allowance, a charge will be applied to the excess amount when you access your SIPP. This will be 55% if you take it out as a lump sum, or 25% if you leave it in the SIPP. There may be another charge applied at age 75, but this depends on what income you take from your SIPP and the investment returns you receive.

It’s worth remembering the aim of this charge is to recoup the tax benefits you enjoyed for saving in a pension, rather than to act as a penalty.

In terms of your available options, continuing to receive your workplace employer contributions – essentially free money from your employer – should be a priority. Even if these contributions take you over the lifetime allowance it can still be worthwhile as you receive the matched employer contribution (albeit subject to a lifetime allowance charge). It’s also worth speaking to your employer to see if they will offer alternative remuneration to your workplace pension.

That said, for additional personal contributions breaching the lifetime allowance is not ideal and you could get better tax benefits, more flexibility, or both, elsewhere.

ISAs offer a flexible, tax-efficient alternative to pensions which
are worth considering. If you’re aged 18-39 then the Lifetime ISA is also a useful retirement saving option with a 25% bonus Government payment.

Lifetime ISA withdrawals are tax free for a first home, from age 60 or if you’re terminally ill, but a 20% early withdrawal charge will apply otherwise (due to increase to 25% from April 2021).

Finally, you mention VCTs and EISs. These are tax-incentivised vehicles aimed squarely at more risky investments, so if you go down this road be prepared for a bumpy ride.

You can read more about how VCTs and EISs can work alongside your pension here .

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Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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