Pension savers are facing a new dilemma ahead of this year’s general election which could dictate how much they withdraw from their retirement savings.
The lifetime allowance will be scrapped from the new tax year on 6 April, removing any limits on how much you can save into a pension.
But Labour has pledged to reintroduce the allowance if it forms the next government, warned Moira O’Neill in the Financial Times, so wealthier savers are facing the question of how to ensure “excess funds” above the threshold are safe.
Some advisers are suggesting clients “crystallise” or withdraw excess funds now, said O’Neill, to “protect against a future tax charge”.
But it is important to plan how you access your fund and how you withdraw your retirement income, said MoneyHelper, to avoid the “risk of running out of money” in retirement.
How pension crystallisation works
Crystallising your pension essentially means accessing your pension savings.
A pension is “uncrystallised” while you are saving into it, explained the Daily Telegraph, “and for however long after you retire that you leave the pot untouched”.
In contrast, “crystallising” your pension is the process of accessing your retirement savings from age 55, said PensionBee, “so any part of your pension pot that you can withdraw and spend has been crystallised”.
This can be done through drawdown or by purchasing an annuity.
One of the main “benefits of crystallising” a pension, added the platform, is being able to withdraw up to 25% tax-free with further withdrawals charged at your marginal rate.
How the lifetime allowance is changing
The lifetime allowance was introduced in 2006 and set a maximum amount on how much could be saved into a pension.
The allowance has “long been controversial”, said MoneyWeek, penalising workers that “diligently save money for retirement and/or make good investment decisions”, and also hitting high earners such as doctors.
Chancellor Jeremy Hunt “surprised almost everyone”, said LoveMoney, in his March 2023 Spring Budget by first withdrawing the tax penalty for exceeding the £1,073,000 limit and then stating that it would be abolished from the new tax year in April 2024.
But what will happen if Labour wins the upcoming general election, added the financial website, “and carries out its pledge to reinstate the lifetime allowance”.
Is now the time to crystallise your pension?
The prospect of a temporary lifetime allowance removal may prompt individuals with substantial funds to crystallise now, said FTAdviser, “rather than risking uncertainty about future developments”.
However, making decisions on “speculation”, may not lead to the best outcomes, added the financial website.
It is “impossible to predict” what Labour may or may not do should the party win the general election, said O’Neill. It may even find the task of reversing the legislation “too difficult” after it has taken “more than 100 pages of legislative change to remove it”.
There are also other risks to accessing too much of your pension too soon.
Entering drawdown too early or taking too much creates a risk that you “spend your retirement savings too quickly”, added the Daily Telegraph. In contrast, an annuity gives you a fixed income for life but it can’t be varied and is gone once you die, added the newspaper.
So, careful financial planning will be needed to make the right decision, whoever is in power.