Brussels (Brussels Morning Newspaper) – The pension lifetime allowance is a limit on the amount of pension savings you can build up without incurring tax charges. The current lifetime allowance is £1,073,100 for the tax year 2021/22. It is possible that this amount can be subject to future changes. The UK government reviews the lifetime allowance regularly, and any changes are usually announced during the annual budget.
While it’s impossible to predict future changes with certainty, it’s worth knowing that the lifetime allowance has remained unchanged since 2016. There have been calls from some industry experts and stakeholders to increase the lifetime allowance to reflect inflation and rising life expectancy. Any changes to the lifetime allowance are designed to impact a small number of savers who built up large pension pots.
How Does The Pension Lifetime Allowance Work in the UK?
The pension lifetime allowance (LTA) is a limit on the total value of pension benefits that you can receive. It comes from all of your pension schemes without incurring an additional tax charge. The LTA applies to all registered pension schemes in the UK, including personal pension contributions, workplace pensions, and defined contribution schemes. Moreover, the current LTA for the tax year 2022-23 is £1,073,100. If the total value of your pension savings exceeds the lifetime limit, you may be subject to an additional tax charge.
The tax charge applies when you take benefits from your pension scheme(s), either as a lump sum or as an income stream. Moreover, the value of those benefits exceeds the LTA. The tax charge is currently set at 25% for lump sum payments and 25% or 55% for income payments. It depends on how you choose to take your benefits.
What Happens If My Pension Exceeds The Lifetime Allowance?
If you think you may be approaching or exceeding the LTA, it’s important to seek advice from a financial adviser. They may help understand your options and any potential tax implications. You can take steps to reduce your pension savings or to mitigate the tax charge. It includes taking benefits earlier or restructuring your pension benefits or arrangements.
It’s important to note that the LTA applies to the total value of your pension savings. It includes any contributions made by you or your employer, and any investment growth or other increases in value. If you have more than one pension scheme, the value of all of your schemes will add up together. It will determine whether you have exceeded the LTA or not.
How Much Is The Tax Charge If Lifetime Allowance Exceeds?
The tax charge for exceeding the lifetime allowance (LTA) depends on how you take your pension benefits. If the total value of your pension benefits exceeds the LTA, you will be subject to an additional tax charge.
If you take your benefits as a lump sum that is currently set at 25% tax charge of the excess above the LTA. When the total pension savings are worth £1,173,100 the tax charge will be £25,000 (25% of the excess £100,000). This happens when you take a lump sum of £100,000.
If you take your benefits as an income stream, the tax charge is either 25% or 55% of the excess above the LTA. However, it depends on how you choose to receive your income. When you choose to receive your income as a lump sum, the tax charge is 55%. Moreover, if you choose to receive your income as an annuity or a flexi-access drawdown plan, the tax charge is 25%.
Will The Lifetime Allowance Increase With Inflation?
The current LTA is £1,073,100 for the 2021/22 tax year. Usually, the pension lifetime is increased in line with inflation each year, but this is not always the case. The government can choose to freeze or increase the LTA by a different amount than inflation. In recent years, the LTA has been subject to changes and reductions by the government.
It is important to stay up-to-date with the latest information. If you have concerns about how changes may affect your pension savings, it is recommended that you speak with a pension specialist. They can provide tailored advice based on your circumstances and help you make informed decisions about your lifetime allowance charges.
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Are Tax-Free Lump Sums Included in The Lifetime Allowance?
Yes, tax-free lump sums taken from a pension scheme are included in the calculation of an individual’s lifetime allowance. The lifetime allowance is a limit on the total amount of pension savings that an individual can build up over their lifetime. The best part is that it is without incurring additional tax charges.