What is the Lifetime allowance? The Lifetime Allowance is the total amount you can build up in pension benefits over your lifetime that will enjoy the full tax benefits that pensions attract. If you go over the allowance you will generally pay tax on the excess when you either take it as a lump sum or income from your pension, transfer your pension overseas or reach the age of 75 without having touched your pension yet. Bear in mind that the state pension doesn’t count towards the lifetime allowance.
The allowance has increased and decreased over time but since April 2018, the government has started to increase the standard Lifetime Allowance by the same rate as inflation.
If the value of all your pensions exceeds the allowance, you’ll usually have a choice as to how you pay the tax due on the excess. For instance, you could choose to take the excess saved into your pension as a one-off lump sum, although this will mean you get charged tax on the sum at a rate of 55%. Or you could keep the money in your pension and withdraw it as income and be subject to tax at 25%. Any further income received under this second option will still be subject to income tax at your highest rate though. For higher rate tax payers the charge could therefore work out the same, or more depending on your individual financial circumstances.
So how do you keep tabs on this and know if you are going to exceed your lifetime allowance? The best way is to continually monitor the value of your pensions, either using your online accounts, or by checking and adding up the values from the annual benefit statements you receive from each of your pension providers every year.
Furthermore, each time your pension benefits are tested against the lifetime allowance, your pension provider will send you confirmation as to how much of your lifetime allowance has been used up, so you will be able to track how much you have remaining before a charge is potentially payable.
With a bit of forward planning it’s also possible for you to estimate how the value of your pensions may change over the years and plan accordingly. The way your pensions are valued for lifetime allowance purposes does, however, differ depending on the type of scheme you are a member of - so check first whether you’re in a defined contribution or a defined benefit scheme.