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Lifetime Allowance Page

Pension Allowance

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Pension Allowance

The maximum amount of contributions on which a member can claim tax relief in any tax year is greater of:

  • the ‘basic amount’ – currently £3600 gross, and
  • the amount of the individual’s relevant UK earnings that are chargeable to income tax for the year.

Lifetime Allowance

Tax Year Amount
2016/17 to 2017/18 £1,000,000
2018/19 £1,030,000
2019/20 £1,055,000
2020/21 to 2025/26 £1,073,100

Lifetime Allowance Charge: 55% on excess paid as a lump sum and 25% on excess designated for drawdown, annuity or scheme pension.

Annual Allowance

Tax Year AA Amount MPAA Amount
2016/17 £40,000* £10,000
2017/18 to 2022/23 £40,000* £4,000

Annual Allowance Charge: Marginal income tax rate on excess, subject to a minimum of 20%.

Carry forward of up to three years unused annual allowance available.

Money Purchase Annual Allowance (MPAA): applies with no carry forward to money purchase pensions once flexible pension income taken from 2015/16.

*Tapered annual allowance: from 2016/17 to 2019/20, tapered by £1 for every £2 of ‘adjusted income’ over £150,000 to a minimum of £10,000 if ‘threshold income’ is also over £110,000.

For 2020/21 to 2022/23, tapered on the same basis if adjusted income over £240,000 and threshold income over £200,000 to a minimum of £4,000.

Pension Lifetime Allowance Q&A Infographic

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If you are a high-income earner or wealthy individual, you could be putting too much into your lifetime pension and risk exceeding the pension lifetime allowance.

Pension Lifetime Allowance Q&A

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How to stay within the limit to avoid a tax charge.

If you’ve been diligently saving into a pension throughout your working life, you should be entitled to feel confident about your retirement.

But, unfortunately, the best savers sometimes find themselves inadvertently breaching their pension lifetime allowance (LTA) and being charged an additional tax that erodes their savings.

The following questions and answers are intended to help you avoid this tax charge.

Q: What is the lifetime allowance?

A: The LTA is a limit on the amount you can withdraw in pension benefits in your lifetime before you trigger an additional tax charge. By pension benefits, we mean money you receive from your pension in any form, whether that’s a lump sum, a flexible income, an annuity income or through any other method. This allowance applies to your total pension savings, which may be in different pensions.

Q: How much is the Lifetime Allowance?

A: In the 2021/22 tax year, the LTA is £1,073,100. This allowance has now been frozen until April 2026.

Q: What happens if you exceed the Lifetime Allowance?

A: Once you have received your full LTA in pension benefits, you will be required to pay an additional tax charge on any further benefits you receive. If you take your remaining benefits as a lump sum, you’ll pay a tax charge of 55%. If you take your remaining benefits as multiple  withdrawals, you’ll pay a tax charge of 25% on each one.

Q: How is the usage of your Lifetime Allowance measured?

A: Each time you access your pension benefits (for example, by purchasing an annuity, receiving a lump sum or establishing a flexible income), this is recorded as a ‘benefit crystallisation event’. There is an additional benefit crystallisation event when you turn 75, and finally, upon your death.

Q: Is Lifetime Allowance protection available?

A: You can only protect your pension from the LTA if your savings were worth more than £1 million on 5 April 2016. You may be able to
protect your pension savings up to £1.25 million, or up to the value of your pension on that date, depending on the type of protection you have.

Q: Is it possible to avoid the Lifetime Allowance?

A: If you do not have LTA protection and you are approaching the limit, there are various actions you can consider. These include stopping your contributions (and, instead, investing your money into an alternative tax-efficient environment), changing your investment strategy or starting retirement earlier.

Q: When should you seek professional advice?

A: The rules around the LTA are very complex and making the right decisions can feel difficult. Receiving professional financial advice will help to identify if you have a problem and offer different solutions to consider, based on a full review of your unique circumstances.

Let us help you make the most of your money – and your future

Everyone deserves a great retirement. Your goals and ambitions are unique to you and we want to help you get there. To discuss your retirement plans, please contact us. Visit our pension Lifetime Allowance page for more information.

Lifetime Allowance

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Breach may impact on more than a million workers

An estimated 1.25 million people are set to breach the current lifetime allowance (LTA) limit of £1.055 million for pension tax relief over the course of their working life, according to new research published.

The LTA is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge. It has been cut three times since 2010, and this research estimates that around 290,000 workers already have pension rights above the limit, and well over a million more people are at risk of breaching it by the time they retire.

Facing a tax charge of up to 55% on pension savings

Those who exceed the LTA could face a tax charge of up to 55% of their pension savings above this level at the time of testing. Around 290,000 non retired people have already built up pension rights in excess of the LTA. Fewer than half of these are thought to have applied for ‘protection’ against past reductions in the LTA and so could face significant tax bills when they draw their pension. Worryingly, many may be unaware of this. Almost half of these people who are already over the LTA are continuing to add to their pension wealth, thereby storing up an even bigger tax charge with every passing year. And amongst non-retired people who are not currently over the LTA, an estimated 1.25 million can expect to breach the LTA by the time they retire.

Groups likely to breach the lifetime allowance

The two main groups likely to breach the LTA are relatively senior public sector workers with long service, whose Defined Benefit pension rights will exceed the LTA, especially as they now have to work to 65 or beyond rather than 60 as in the past, and relatively well-paid workers in a Defined Contribution pension arrangement where their employer makes a generous contribution into their pension pot.

Highest earners may be less affected by the lifetime cap

Typical salary levels of those affected are in the range £60,000–£90,000 per year. But ironically, the very highest earners may be less affected by the Lifetime Cap because they are now heavily limited by the amount they can put into a pension each year. The data suggests that only a couple of thousand people exceeded the LTA in the latest year for which figures are available (2016/17). The number likely to face a tax charge could therefore increase more than a hundredfold, purely based on those who have yet to retire but who have already exceeded the LTA.

Workers who would not regard themselves as ‘rich’

The research finds that one of the reasons why so many people will exceed the LTA is that current policy is simply to increase it each year in line with price inflation (as measured by the CPI). By contrast, wages will tend to grow faster than inflation, and the money invested in pension pots should grow faster than inflation over the long term. This means that the LTA will ‘bite’ progressively more severely over time and will affect hundreds of thousands of workers who would not regard themselves as ‘rich.’ t

Source data: [1] Research conducted for Royal London is based on detailed analysis of data on more than 7,700 workers from Wave 1 and Wave 5 of the ‘Wealth and Assets Survey’ March 2019.