Lifetime Allowance – The Basics

What is the Lifetime Allowance?

The Lifetime Allowance is the total amount of savings an individual can build up across all their pensions accounts without paying extra tax charges.  This includes all pension savings, defined contribution and defined benefit, but excludes your state pension.

Pension savings are tested against the Lifetime Allowance when an individual accesses some or all of their pension, whether lump sums or retirement income or reaches the age of 75 without having taken any benefits.

How much is the Lifetime Allowance?

For the tax year 2021/22 the lifetime allowance stands at £1,073,100

It has been frozen until tax year 2024/25

How much is the Lifetime Allowance Charge?

Excess pension savings above the Lifetime Allowance are charged at 55% if taken as a lump sum and 25% if taken as income.

Lifetime Allowance Protection

The Lifetime Allowance has been reduced considerably since it was first introduced in 2006/7 tax year and as a result many individuals may now unknowingly face a potential tax charge.

It has been possible to apply for protection from reductions in the lifetime allowance, which may secure an individual a higher lifetime allowance.

Two types of protection are available to apply for today:

Individual protection 2016

Available to certain eligible individuals with total pension savings in excess of £1m at 5th April 2016

Provides a protected lifetime allowance to the value of an individuals pension savings on the 5th April 2016 to a maximum of £1.25m

Importantly this protection allows an individual to continue to build pension savings, however a tax charge is payable on excess above protected amount.

Fixed Protection 2016

Available to certain eligible individuals who have had no contributions added to their pensions since 5th April 2016.

Provides a protected lifetime allowance of £1.25m, it does not allow individual to make further pension contributions.

Careful planning can help to manage the impact of the Lifetime Allowance charge.   If your total pension savings are likely to exceed the Lifetime Allowance you should seek advice.

Need to talk to someone to discuss your lifetime allowance?