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.
Pension provider Royal London has some more information here.
* From April 5th 2020, the Lifetime Allowance rises marginally to £1,073,100.