Is it worth paying into a pension after you reach the lifetime allowance?

I’m in the very fortunate position of having run up to my lifetime allowance at the age of 48.

With hopefully another 19 years of healthy earnings of more than £400,000 a year, should I continue to pay into my Self-Invested Personal Pension, having exhausted Isas?

In other words does the tax benefit of paying in and compounding returns over the next 20-25 years or so outweigh the tax penalty on drawdown?

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Steve Webb replies: At your level of income and having built up a substantial pension pot you should certainly be taking professional financial advice about your options, but I’m happy to offer some general pointers about how the system works.

As well as advising you on investment, an adviser should also talk to you about things like income protection if you should suffer ill health, provision for any partner or children and so on.

For example, if you have a spouse who has not used up all of their pension tax limits then building up their pension might be another option.

As a reminder, the lifetime allowance is a limit on the total value of pension you can build up over your life whilst benefiting from tax relief.

The current value of the LTA is £1,073,100. The current policy is for this figure to rise in line with inflation each year, though previous Chancellors have sometimes frozen or cut the LTA.

We can have no certainty about what will happen to this figure in the future, especially if the Chancellor is looking for ways to fill the hole in his Budget.

For those who go above the LTA, there is a system of tax charges which, in simple terms, seek to claw back the tax advantages you gained by those additional contributions.

I should stress that there is nothing ‘illegal’ in going over this tax limit, you simply no longer benefit from a tax break on the extra pension pot.

Anything you draw in excess of the LTA is subject to a tax charge either at 55 per cent if you take it as a lump sum or 25 per cent if you take it in any other way.

This is on top of any tax due on the income in the normal way. You can read more about the rules here. 

One big advantage of saving through a pension aside from the tax advantages is the possibility of a contribution from your employer.

If your employer will pay into a pension but would not pay into an Isa or other form of investment, then you should think seriously about continuing to take up any contribution your employer will make.

However, some employers will offer you pay in lieu of a pension contribution if you decide to opt out of pensions, so you should find out what might be on offer.

Aside from the tax breaks and any employer contribution, a pension is pretty much like any other investment.

Your pension might be invested in a range of assets including shares, property, bonds or cash, but you can mirror that investment mix in an Isa or other investment products.

Depending on the relative charges you would pay, there may be nothing ‘special’ about investing for growth via a pension compared with other routes.

It is worth pointing out that there are other forms of investing where the government uses tax breaks to encourage people to invest and which are used by some high earners.

One is the Enterprise Investment Scheme which is designed to help smaller companies who are not listed on the stock market to raise funds.

Another is investing via a Venture Capital Trust where you are investing in a company which lends money to unlisted companies.

In both cases the investor gets tax advantages, but both involve considerable amounts of risk and you may have to tie your money up for minimum periods of time.

You should therefore definitely take advice before going down this route.