How will the Lifetime Allowance affect me?

07 July 2021

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Question by Timbo

My question relates to the Life Time Allowance, which I find very confusing.

I am 53 and currently have circa £600k across two pension funds (Aviva & Old Mutual). I intend to retire abroad in 4 or so years by which time I estimate my joint funds will be arounds £800k (as I am fortunate enough to be able to pay the maximum £40k in annually across the two).

As I am moving abroad I will be taking out the maximum 25% tax free amount in cash to live off for a few years, leaving the remaining £600k to grow before drawing down on it in the future.

At which point will the Life Time Allowance mean I have to pay further tax on the remaining investment?

Any help would be great.

Thanks.


Answered by Carla Brown

Hi Timbo, thank you for getting in touch. I’m sure that you’re not the only person who finds the lifetime allowance confusing.

The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes without triggering an additional tax charge. The lifetime allowance for the tax year 2020/21 is £1,073,100.

When you draw benefits from your pension, or if you should die before taking any benefits, a benefit crystallisation event (BCE) takes place and the value of your benefits are tested against the lifetime allowance. If you have not taken all of your benefits by age 75, a lifetime allowance test will be carried out at this age, on your remaining benefits.

Answered by

Carla Brown

Founder and Managing Director

Carla is the founder and Managing Director of Oakmere Wealth Management Ltd which is a growing practice on the outskirts of Chester.