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Lifetime Allowance

When Might You Pay Additional Tax on Your Pension?

The Lifetime Allowance is a limit on the total value of payouts from all your pension schemes - whether lump sums or retirement income - that can be made without triggering an additional tax charge.

The Lifetime Allowance is currently £1,073,100. So for many the Lifetime Allowance is likely to be of little relevance. However, whilst the current allowance might seem quite big, the allowance has actually been dramatically reduced in recent years, from its height of £1,800,000 million in the 2010/11 tax year.

The current allowance of £1,073,100 will increase each year in line with inflation (CPI - Consumer Price Index) on the 6th April each year.

You can work out whether you are likely to be effected by the additional tax by adding up the expected values of your pension plans and payouts. For a defined contribution scheme (this includes all forms of personal pension and money purchase pension schemes) the values of your benefits will simply be the value of your pension pot. For defined benefit schemes, you can calculate the value by multiplying the expected annual salary by 20 and then adding any lump sum payment that you are also entitled to. As an example an individual in a Final Salary (defined benefit) pension scheme expecting an income of £43,500 per year and a lumps sum of three times this amount at outset, will in effect have a total value of just under the Lifetime Allowance of £1,073,100 (i.e. £43,500 x 20 = £870,000 plus £43,500 x 3 = £130,500 which together make the assessed value of the pension £1,000,500).

So as a result of the lower Lifetime Allowance more people will be effected by the additional tax charge.

The tax charged on funds in excess of the Lifetime Allowance is currently 55% where payments are taken as lump sums and 25% where the funds are taken as income payments.

You can apply to protect the benefits you have accrued, by means of either Fixed Protection or Individual Protection, BUT, we strongly recommend you take advice before doing this.

Fixed protection
This allows you to retain the higher £1.25 million allowance (although you will lose the protection if any pension contributions or accruals are made from 6 April 2016 onwards - so you will have to cease making or being part of any future pension scheme)

Individual protection
This allows you to retain a lifetime allowance based on the value of your pension as at 5 April 2016, subject to a limit of £1.25m. It is only available if your pension pots were worth at least £1 million, as of 5th April 2016. The advantage of this protection is that pension contributions can still be made.

* Tax Information given is based on the 2020/21 tax year, and may be subject to change in the future. Any contributions in excess of you annual allowances will be taxed at your marginal rate.

THE VALUE OF A PENSION IS NOT GUARANTEED AND CAN GO UP AND DOWN DEPENDING ON INVESTMENT PERFORMANCE. YOU COULD GET BACK LESS THAN YOU'VE PAID IN.