Does your pension fund exceed the new limit?

8th April 2016

The Lifetime Allowance is a limit on the amount of money that can be drawn from pension schemes – whether lump sums or retirement income –without triggering an extra tax charge.

The limit reduced to £1million on 6th April 2016.

The rate of tax you pay on pension savings above your Lifetime Allowance depends on how the money is paid to you – the rates are:

  • 55% of any amount you take from your pension savings as a lump sum that is over the Lifetime Allowance
  • 25% of any amount you take from your pension savings as pension income that is over the Lifetime Allowance

We have seen an increasing number of existing and new clients who are already affected by the reduced limit, or can reasonably foresee that they will be.

If you’re in more than one pension scheme, you must add up the allowance that you have used in all pension schemes you belong to:

  • Calculate the total value for those pensions which provide a fund value (usually known as defined contribution/personal pension schemes).
  • Add the value of any final salary pension benefits (which is usually 20 times the pension you will get in the first year plus your lump sum entitlement).

We recommend that you seek advice if the total value of your pensions exceeds the Lifetime Allowance or is likely to do so by the time you stop work.

It is possible to retain a Lifetime Allowance at the previous limit, which was £1.25million; there are various types of protection each with their own conditions.

In summary, while most people aren’t affected by the Lifetime Allowance, you should take action if the value of your pension benefits is approaching, or above, the new Lifetime Allowance.  As pensions are a long term commitment, what might appear a modest amount today could exceed the Lifetime Allowance by the time you want to take your benefits.