If your pension savings are likely to be close to £1,073,100 by the time you retire, then you need to know about the lifetime allowance.

pension lifetime allowance

The pension lifetime allowance limits the total amount that you can save in pensions whilst receiving tax relief. This applies to the value of all your pensions, except your state pension. If your pension savings exceed the lifetime allowance, you’ll generally pay a tax charge on the excess when you;

  • Take a lump sum or income from your pension pot
  • Transfer overseas
  • Reach age 75 with unused pension benefits.
  • Pass away, with unused pension benefits

The tax charge applied depends on how you take or ‘crystallise’ the excess pension savings.

  • Take the excess as a lumpsum and it will be subject to a 55% tax charge.
  • Leave the funds within your pension wrapper and take it as income, with a 25% tax charge applied. Your marginal rate of income tax will also be applied.

Examples of Pension lifetime allowance

  • If you were to crystallise a pension pot worth £200,000, you could take up to £50,000 as a tax-free cash lump sum and the rest will be taken as income. The £200,000 will be tested against your lifetime allowance. This uses up to 18.6% of the standard lifetime allowance.
  • If you take a £30,000 Uncrystallised Funds Pension Lump Sum (UFPLS) withdrawal, only £30,000 will be tested against your lifetime allowance or 2.79% of the standard lifetime allowance. Any remaining pension pot value will not generally be tested until you withdraw any further amounts or reach age 75.

The way your pensions are valued depends on the type of scheme you’re a member of. Defined contribution pensions, which provide you with a retirement income based on yours and your employer’s contributions, are tested based on the overall value of your pension pot. 

To calculate the total pension value for lifetime allowance purposes, for Defined Benefit pensions, there’s a formula. Multiply your expected annual pension by 20 and add this figure to the amount of any tax-free, cash lump sum available from that pension.

Protecting against the pension lifetime allowance charges

pension lifetime allowance

If your circumstances are right, you may be able to protect your pension savings against the Lifetime Allowance tax charge, via the use of Transitional Protection. There are two types of Transitional Protection currently available:

  • Fixed protection 2016 provides you with a lifetime allowance of £1.25m. However, you can’t apply for this protection if you have accrued any pension benefits after the 5th April 2016.
  • Individual protection 2016 gives you a personalised lifetime allowance that is equal to the value your pensions on the 5th April 2016. To be eligible your pensions will need to have been worth £1m or more on this date. Your protection amount is capped at £1.25m. You can still make contributions to your pension, but you will be taxed on the excess above your protected lifetime allowance.

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  • Mitigate Lifetime Allowance taxes
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