What is the Lifetime Allowance?

The lifetime allowance is the total amount you can build up in all your pension savings without incurring a tax charge.

Although there’s no limit on the amount an individual can accumulate into their registered pension schemes, there is a limit on the level of tax-privileged benefits. So, effectively, your lifetime allowance determines the amount of benefit you can receive before you have to pay additional tax on either pension income or lump sums over and above this limit.

The current standard lifetime allowance is £1,073,100, and will remain so until at least 2025/26, therefore we expect more individuals to become impacted by this limit.

If you’ve built up more than the value of the lifetime allowance when a calculation is carried out, you might have to pay a tax charge. A lifetime allowance test is typically carried out:

·        When you start drawing a defined benefit pension

·        When you take an income or lump sum from a defined contribution pension

·        If you transfer a pension overseas before age 75

·        If you reach your 75th birthday and have pension in drawdown or that you haven’t touched 

·        If you die before age 75 and have pensions you haven’t touched.

After age 75, there are generally no further checks against the lifetime allowance.

How is the Lifetime Allowance Calculated?

For a Defined Contribution Pension (where the underlying value of your pension is made up of the amount you have contributed and the performance of your investments), it is just a case of calculating the percentage of the total fund value. So if the total fund value was £156,284.79, it would be divided by the LTA and multiplied by 100.

i.e. £156,284.79 divided by £1,073,100 multiplied by 100 = 14.56% of your Lifetime Allowance has been used.

When working out the Lifetime Allowance calculation for a Defined Benefit (DB) Pension, you multply the annual benefit by 20 plus any separate tax-free cash lump-sum. (If a Defined benefit pension is transferred to a personal pension, the Lifetime Allowance is calculated on the Cash Equivalent Transfer Value (CETV).

i.e. A defined benefit pension will provide an annual benefit is £9,645.32 and a tax-free lump sum of £35,000.00. The calculation is performed by multiplying the annual benefit by 20 = £192,906.40 plus the tax-free lump sum of £35,000.00. Totalling £227,906.40, so it would use 21.24% of your LTA.

What if you exceed the Lifetime Allowance?

Lump Sums - If you take the excess as a lump sum, you are subject to income tax at 55% on the amount in excess of your lifetime allowance.

Income - If you keep the money in the pension and withdraw the income from it at a later date, you would incur an immediate 25% tax charge. This is on top of any income tax you pay on the income you receive in the future.

  If you would like to learn more about this subject or require Independent Financial Advice from our local, experienced and friendly team, please feel free to contact us on 01788 57 11 22.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. It does not constitute advice. All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor. 

PJL Financial Services Limited are authorised and regulated by the Financial Conduct Authority. 

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