Viewpoint: Pension lifetime allowance – how it affects you

In his 2021 Budget, the Chancellor announced a five-year freeze on the lifetime pension allowance. What does this mean for you and your retirement fund?

What is the lifetime pension allowance? 

The lifetime pension allowance sets a limit on how much you can save in your pension before you start paying tax on anything over the limit. For a few years before the 2021 announcement, the limit had been tied to inflation, meaning that it rose in line with the cost of living. #

With the global pandemic and surge in inflation over the past couple of years, the decision was made to freeze the limit – at £1.073 million – until 2026. It’s hoped that the freeze will generate additional revenue as savers slow down or stop contributing to their pensions and don’t claim tax relief from the government.

How are my pensions affected by the lifetime allowance? 

The lifetime allowance applies to all types of non-state pensions in your name – so that includes any defined benefit (final salary or career average) schemes you have along with any defined contribution pensions. 

The limit of £1.073 million might seem like a huge amount. But if you’re a medium-to-high earner, have saved into pensions from an early age and are approaching retirement, you could one of the millions who are affected (and caught unawares) by reaching the threshold. 

As pensions are so complicated, seeking advice is important and we can help clarify the status of your pensions, discuss your retirement plans and how to proceed.

What happens if you exceed the lifetime allowance? 

Many of us have more than one pension, usually accumulated through different jobs over the years. Keeping track of them and how much they contain can be tricky and time consuming, as you’ll need to look at their expected value when the time comes. 

Your adviser is best placed to gather this information and help with your next steps. 

If your total exceeds the lifetime allowance, the excess amount will be taxed as follows:

• 55% if you receive the amount as a lump sum from your provider 
• 25% if your payments are gradual or are cash withdrawals