Ellis Bates Financial Advisers
What is Pension Lifetime Allowance (LTA)?Following the 2023 Spring Budget, Jeremy Hunt has announced that the Lifetime Allowance charge will be removed from April 2023 before it is abolished entirely from April 2024.
The pension lifetime allowance is the total amount you can build up in your pension savings over your lifetime that will bring maximum tax benefits and without incurring a tax charge.
If you exceed this allowance you will generally pay a tax charge on the excess when you take a lump sum or income from your pension pot, transfer overseas or reach age 75 with unused pension benefits.
The lifetime allowance includes both company and private pensions, but does not include the value of your State Pension.
Amy Burge, Financial Planner at Ellis Bates
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There have been several changes in the limit, from £1.25m, to £1m and now for the current tax year the lifetime allowance is £1.0731m.
If you have a generous workplace pension or have saved significant amounts into personal pensions, it really is worth checking the value of these pensions against the LTA to ensure you don’t go over this limit.
This calculation is complex, and depends on the type of pensions you have and whether you are already taking lump sums or an income from these pensions.
This type of pension is usually built up from both personal and employer contributions which are invested over your lifetime to provide a pot of money for retirement. You need the total fund value, found on your annual statement(s) and the fund value includes both contributions and growth value.
These types of pensions your retirement income is based on your salary and the length of time you worked for your employer(s). Rather than showing a ‘fund value’, your annual statement shows the pension you are on track to receive at retirement.
For LTA purposes you need to multiply this annual pension by 20 to get the theoretical ‘fund value’. Many final salary schemes offer a tax-free lump sum, before income begins and may be in addition to your full pension income or by reducing your pension income to provide the lump sum. The calculations can be complex and we encourage you to speak to a financial adviser who is licensed to deal with these types of pension.
If you have started taking an income from a DC pension since the LTA was introduced on 6 April 2006, you should have been assessed already. Your pension provider or financial adviser will be able to confirm the figure that was calculated.
If you were already in receipt of a pension before 6 April 2006 and have continued to save into other pensions since then, where no subsequent lifetime allowance tests have been triggered, different rules apply:
This is a complex area and we would encourage you to discuss this with a Financial Adviser.
You will not receive any ‘warnings’ from your pension provider(s) or HMRC if you are near your limit.
| Age 55 when you are able to access part, or all, of your pension | once you take a lump sum or income from your pension it is tested against the LTA. At this stage it’s important to know that it is the total value of the pension that you ACCESS that is assessed against the LTA, not your total fund value. |
| On your 75th birthday | any pensions you have not cashed in or accessed are tested against the LTA and any existing drawdown pensions will be re-tested against their original value. |
| If you die before the age of 75 | any untouched pensions will be tested against the LTA to ensure this limit has not been exceeded. |
| If you transfer some, or all, of your pension into a ‘Qualifying Recognised Overseas Pension Scheme’ before the age of 75 | only the value of the funds transferred are tested against the LTA. |
If you go over this lifetime allowance, you will typically pay a tax charge on the excess when you take a lump sum or income from your pension pot, transfer overseas, or reach age 75 with unused pension benefits. The excess can be paid as a lump sum, subject to a 55% tax charge
We recommend you seek expert financial advice as soon as possible to examine your particular circumstances and to identify the actions you will need to take.
We are here to help you achieve your retirement goals with expert pension planning.
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