The lifetime allowance currently caps the total amount you can build up in pension benefits over your lifetime with full tax benefits applying, at £1,055,000. While the idea of a £1,055,000 pension pot may sound fanciful, it’s easier to rub up against this lifetime allowance than you might think. If the value of your pension pot rises above this limit, you can continue to pay into your pension, but will generally face tax charges on the excess when you withdraw the money, transfer overseas or reach age 75 with unused pension benefits.
These tax charges can be high. 55% when the excess is withdrawn as a lump sum and 25% plus your marginal rate of income tax if taken as income. This is a lot to lose and there are usually better options.
As a result, diligent pension savers need to keep an eye on the value of their pensions. Fidelity’s Senior Adviser, Charlie, shares four key questions to ask yourself when reviewing the value of your pensions.
1. Am I near the lifetime allowance limit today?
It isn’t always easy to work out if you will exceed the lifetime allowance limit. You may have multiple pensions, of different types, each with a different calculation method. The lifetime allowance is aggregated across all your pensions, so you need to include all of them in your calculations. This includes, both company and private pensions, such as SIPPs and final salary pensions. It doesn’t include the value of your state pension though.
For more information on the calculations needed for company and private pensions, including pensions that are already paying read our guide.
2. Could new contributions and investment growth push me over the limit?
Investment growth and additional contributions can push you over the limit, over time. So, it’s important to factor this in to your calculations.
3. Am I confident in my calculations and that I have everything covered?
Make sure you’ve incorporated all your pension scheme providers, including your employer. It’s up to you - neither the tax authorities, nor your pension providers, are checking the value of your pensions against the lifetime allowance on a daily basis. It is only once you start withdrawing money from your pension fund that HMRC tests it against the lifetime allowance (it’s also tested on your 75th birthday if you still have money in a pension, whether you’re taking any benefits or not). Don’t expect a warning letter; it’s your responsibility to check.
If there is anything you are unsure about we’d encourage you to speak to a retirement adviser or seek specialist tax advice.
4. What can I do if I think my pension will exceed the lifetime allowance?
If you’re getting close to the pension lifetime allowance, there are things you can do to safeguard your money. Each time the government has reduced the lifetime allowance, it has set up various ‘protection schemes’ so you may be able to apply for protection, which could give you a higher lifetime allowance (there are restrictions as well). If you are unable to obtain protection, then it is worth noting the current lifetime allowance is due to increase each year in line with consumer price inflation (CPI).
You can read more about the how the protection schemes work and how to apply for them in our lifetime allowance guide. Remember, it’s your responsibility to check the value of your pensions and to apply for the relevant protection scheme.