Will The Lifetime Allowance Impact Your Pension | moneyfacts.co.uk

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Derin Clark

Derin Clark

Online Reporter
Published: 25/05/2021

In the spring budget, the Government froze the Lifetime Allowance on pensions until the 2025/26 tax year. As many pension savers may not be aware of what the Lifetime Allowance is and whether it will impact their retirement savings, here we’ve looked at who the Lifetime Allowance will impact and how pension savers can lock into a higher amount.

What is the Lifetime Allowance?

The Lifetime Allowance is a maximum amount that can be saved into a pension over a lifetime without incurring a tax liability. The current limit is £1,073,100 and during the budget, the Government said that this amount would be frozen for five years. Prior to the freeze, the Lifetime Allowance was expected to rise each tax year at the rate of inflation. Although even at its frozen limit the majority of pension savers will unlikely have to worry about paying tax on savings above the Lifetime Allowance, the rising rate of inflation, as well as the possibility of high investment growth in the next few years, could mean that some pension savers may see their savings exceed the limit.

The charge on pension savings over the Lifetime Allowance can be significant. Funds that exceed the limit and that are used for income purposes, such as purchasing an annuity or placing the money into drawdown, even if no income is taken, are subject to a 25% lifetime allowance charge, as well as the standard income tax payable on income payments. Alternatively, if the money exceeding the limit is withdrawn as a lump sum, a 55% Lifetime Allowance charge will apply, although there will be no further income tax payable.

When do you have to pay the Lifetime Allowance charge?

The Lifetime Allowance charge does not have to be paid until certain events take place. These include:

  • Passing away before the age of 75 with funds that have not been accessed at all (known as uncrystallised funds).
  • Reaching the age of 75 with uncrystallised funds or funds in drawdown.
  • Taking benefits from the pension, such as a tax-free lump sum, a regular pension amount or placing the funds in drawdown.

It is important to remember that only the funds that exceed the Lifetime Allowance limit are subject to the charge.

How to lock into a higher Lifetime Allowance

Pension savers who have been a member of a registered pension scheme since 2016 may be eligible for protection that gives them a higher Lifetime Allowance limit. There are two types of protection schemes available, these are known as Fixed Protection 2016 and Individual Protection 2016.

Those who have not made any pension contributions or built-up benefits in a final salary scheme since April 2016 can register for Fixed Protection 2016. This scheme allows savers to lock into a higher Lifetime Allowance limit of £1.25 million.

Those who have made pension contributions since April 2016 and who’s pension savings were over £1million on 5 April 2016 can register for Individual Protection 2016. This scheme allows those who had exceeded the current Lifetime Allowance limit before 2016 to have a higher limit to cover the excess funds, which is capped at £1.25 million. Pension savers should note, however, that only the funds exceeding the current limit before April 2016 will be protected.

How to get a free tax and pension review

If you want advice about the tax implications of your pension savings, consider talking to Kellands for a free tax and pension review, which you can book here.


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