What is a Pension Lifetime Allowance?

A Pension Lifetime Allowance is the amount of money your collective pensions can be worth before you are taxed.

In 2022-2023, it was set at £1.073 million. This figure is frozen until 2026, which is unusual – usually it increases year on year with inflation. For instance, in 2019 it rose by 1.7% to keep in line with the inflation rate at that time.

It’s important to note that all money going into your pension, such as your and your employer’s contributions, pension growth and tax relief, all contribute towards this limit.

When is the Pension Lifetime Allowance triggered?

The Pension Lifetime Allowance tax charge only comes into effect when you take your pension savings or when you reach the age of 75, whichever comes first.

How much will I be charged?

The amount you will be charged is dependent upon two factors:

  • How much you have exceeded the allowed figure

  • Whether you are taking money from your pension or not, and how you have decided to withdraw it

Is this the same as annual allowance?

No, annual allowance is the amount of money you can save into your pension pot each year without being taxed. Your annual allowance depends on whether or not you have started to withdraw more that the first 25% of your pension.

How can I withdraw money from my pension?

There are many ways in which you can withdraw money from your pension, and the earliest age which you can do so is 551. This law was instigated as part of the Pension Freedoms Act in 2015. You can take money from your fund in one lump sum, a series of lump sums, as an on-going income or as a mixture of all these options.

You can buy an annuity (so creating an on-going income) or you can take money as drawdown from your pension fund.

How do I know if I am approaching my lifetime allowance?

It’s obviously a good idea to monitor the growth of your pensions so that you are not surprised by an unwanted tax charge. If you have many different pension funds it may be useful to consider combining them to help you keep track.

The actual figure your pension fund is worth at any one time is complex and you do not want to go over your limit by accident. To get an idea of the value of your pension, the best thing to do is to speak with a regulated financial adviser. By checking your pension, they can find out how much you have saved, the charges you pay and the performance of your investments to give you a clear overview of how much your pension is worth.

What happens if I go over my allowance?

This depends on how you withdraw money from your fund. If you buy an annuity or commit to a drawdown plan (this means you are receiving an income on a regular basis) you will be charged 25% of the money you receive above your allowance.

If you decide to take the money as a lump sum, you will be charged tax at 55% for any money received above your Pension Lifetime Allowance.

You will not however be approached by the tax office themselves. Your pension provider will take tax charges away from any pension funds you are due to receive. You will also be notified by your pension provider when you go over the limit.

How can I protect my pension?

There are two types of Pension Lifetime Allowance protection:

Individual Protection 2016

This is so called because it is related to the value of your pensions in this year. If your pension fund was worth more than £1 million on 5th April 2016, you can claim it. In this way, you only pay tax on money taken from your pension which exceed your Personal Lifetime Allowance.

Fixed Protection 2016

This form of protection is most useful for those who do not wish to pay into their pensions anymore (i.e. they have reached pensionable age). Fixed Protection 2016 fixes your Personal Lifetime Allowance at £1.25 million. Paying money into a pension when you have this protection will mean losing this money and being charged.

How can I get further advice?

This allowance can get very complicated. A regulated financial adviser, such as Portafina, will be able to look at your funds with a trained eye and walk you through your options.

1It’s important to remember that taking money from your pension early isn’t right for everyone as it can leave you with less to live on later in life.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.