Lifetime Allowance

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Lifetime Allowance in the UK affects thousands of pension savers each year. With a headline tax rate of 55%, financial planning is important to understand your position and to mitigate the impact of any possible tax charge.

Some of the most common enquiries that we are asked include: how am I affected by the Lifetime Allowance? What can I do about it? Is it worth still paying into a pension when I’ve already reached the Lifetime Allowance?


Lifetime Allowance common questions:

What is the pension Lifetime Allowance?

The Lifetime Allowance is the total amount that an individual can build up in all of their pensions, without incurring a tax charge.
The LTA was introduced by the UK government in 2006; it was initially set at £1.5m, although the level has changed several times since.

Pension Lifetime Allowance - limits

How might you be affected?

If pension assets and entitlements are deemed to be in excess of the lifetime allowance when benefits are taken, then a tax charge will be levied on the surplus at 55% of the excess if taken as a lump-sum; or 25% if taken as income (which will then also be taxed at marginal rates as income in addition when benefits are taken).
The tax charge can be triggered in a number of ways including:

• taking income from your pension or pensions
• taking lump-sums from your pension
• transferring your pension overseas
• simply reaching age 75; even if you haven’t accessed your pension(s)
• on the event of your death

What can you do about it?

There are forms of Lifetime Allowance Protection available to protect savers affected by the changes to LTA for a limited amount of time.

2016 – Fixed Protection

If the value of your pension assets was below £1m at 5th April 2016, Fixed Protection 2016 will preserve a lifetime allowance of £1.25m for those who successfully apply for it. In order to maintain Fixed Protection 2016 all future pension contributions would have to cease and no future accrual would be permissible in defined benefit (final salary) schemes.

2016 – Individual Protection

For those with funds/ benefits in excess of £1m at 5th April 2016, the value at this date will be protected up to £1.25m. Future accrual and ongoing contributions may continue.

2014 – Fixed Protection
It may be possible to preserve funds or benefits of up to £1.5m under a previous transitional protection arrangement from 2014 when the lifetime allowance reduced from £1.5m to £1.25m depending upon your circumstances. Similar to 2016 Fixed Protection, no further accrual or funding is permissible.

Other Points to note

If pension funding is approaching the stage where the lifetime allowance is a threat to the tax-efficiency of your retirement plans, consider funding plans on behalf of a spouse as an alternative.
Caution should be exercised if previous steps have been taken to address the lifetime allowance in the past. For example, primary or enhanced protection.

Do you need financial advice for Lifetime Allowance?

For those that are affected by the Lifetime Allowance, there can be significant charges involved after breaching the limit.

If you believe that you may be affected by the LTA and would like further advice on how best to approach the subject, please get in touch for a confidential consultation. Broadly speaking, if your pension assets are valued in excess of £500,000 or you are aggressively funding your pension there may be a realistic prospect that you may be affected by this issue during your lifetime even after benefits have been taken initially. With a headline tax rate of 55%, financial planning advice will be worthwhile.

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How has the pension Lifetime Allowance changed over time?

The pension Lifetime Allowance limit for individuals in the UK, has changed significantly since it was introduced in 2006.

2006/07 – £1,500,000
2007/08 – £1,600,000
2008/09 – £1,650,000
2009/10 – £1,750,000
2010/11 – £1,800,000
2011/12 – £1,800,000
2012/13 – £1,500,000
2013/14 – £1,500,000
2014/15 – £1,250,000
2015/16 – £1,250,000
2016/17 – £1,000,000
2017/18 – £1,000,000
2018/19 – £1,030,000
2019/20 – £1,055,000
2020/21 – £1,073,100
2021/22 – £1,073,100

Will the Lifetime Allowance increase?

From April 2018 the LTA was indexed to increase each year in line with inflation, or more specifically the increase in CPI. Therefore it was due to increase gradually over time. And so from 2018-2021, the lifetime allowance was:
2018/19: the limit was £1,030,000
2019/20: £1,055,000; and
2020/21: £1,073,000

However, it was announced by chancellor Rishi Sunak in March 2021, that the Lifetime Allowance would be maintained at £1,073,100 until April 2026. This was seen as a step to increase the governments tax takings following the massively increased spending through the Covid pandemic. Whichever side of the political fence you are on, the continued tinkering will be understandably frustrating to those higher earners who are or may now be affected.

Is it worth still paying into a pension when I’ve already reached the Lifetime Allowance?

It may be that you are already in excess of the LTA or that you are on course to be in excess of the limit.
However, that doesn’t necessarily mean that continued pension contributions no longer represent good value.
For example, if your employer made contributions to your pension without you making any personal contributions.

Clearly, your current personal and financial arrangements will dictate which options will be open to you and what the best course of action is. Speaking to an Independent Financial Adviser is often a good first step.

To speak to an adviser regarding Lifetime Allowance planning, or retirement planning more generally, contact us for a free face to face or online consultation:

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