The Lifetime Allowance
What is it?
You, as a dutiful and responsible person, save into a pension. The government gives you some bonuses along the way for doing do. But then, you get to a certain point, and not only does it stop giving you bonuses, it imposes all sorts of onerous taxation. This point is the Lifetime Allowance.
How much is it?
Until recently, the lifetime allowance was super-high and didn’t affect very many people. Now, it has been reduced to £1m. Now this may sound like a vast sum of money, but it is what you need to get an income of around £50,000 at 65 on today’s annuity rates. It is a particular peril for those on final salary pension schemes, and those in the public sector. Equally, strong investment growth and/or inflation could take you over the limit.
What are the penalties for exceeding it?
Nasty. Any amount over your lifetime allowance taken as a lump sum is taxed at 55%. Any amount over your lifetime allowance that you take as a regular retirement income – for instance by buying an annuity – attracts a lifetime allowance charge of 25%. This is on top of any tax payable on the income in the usual way, so you could be paying 65%+ on it. Ouch.
When do I need to worry?
Surprisingly early. Someone who is 20 years from retirement with pensions worth £375,000 would exceed their allowance if their money grew at 5% a year – the historic growth rate from the stock market – with no further contributions. You can apply for lifetime allowance ‘protection’ subject to certain rules. This usually means that your pension can keep growing to a higher cap, but you can’t make any further contributions.
What should I do?
Check with your various pension scheme providers, including your employer. If you think you might be in trouble, it may be worth taking advice. This is a complicated area and it could cost you a lot of money. You may need to talk to your employer about structuring your benefits differently, or stop making personal pension contributions.
Having too much saved for your pension is a nice problem to have, but it’s best to ensure that the tax man’s not about to land a nasty surprise.
Content correct as of November 2016
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