It’s one of the most searched for questions online, so in simple terms what is the Pension Lifetime Allowance?
The Pension Lifetime Allowance is the limit of tax privileged Pension funds that a person can build during their lifetime. The standard lifetime allowance is currently £1,073,100 for the 2021-22 tax year. It was announced in the 2021 budget that it will remain at the current level to 2025/26, and won’t be rising in line with the CPI rate of Inflation.
A lifetime allowance tax charge would apply if you exceed the Pension Lifetime Allowance, so it is worth speaking to a financial adviser if this is a concern. For some people, the Pension Lifetime Allowance won’t be an issue, but over a lifetime of investing and investment growth you may find you accumulate close to the allowance.
To find out how much of the Pension Lifetime Allowance you’ve used, speak to your Pension provider. And if you’re in more than one Pension scheme, you must add up what you’ve used in all Pension schemes you belong to. Remember, it’s not a limit, you can save more. You only start paying extra tax when you take more than your allowance from your Pension – not just when your Pension pot reaches it.
The Pension Lifetime Allowance tax charge only takes effect when you take your pension savings, or when you reach 75. The charge only applies to the amount of money you take over the lifetime allowance. The charge you pay depends on the way you take the money out of your Pension. Take the excess as Pension Income and the charge is 25%. You may also pay Income Tax on any taxable money you take. Take the excess as a lump sum and the charge is 55% but you won’t pay any Income Tax.
It is much better to get sound financial advice from a qualified expert when it comes to large sums of money and the tax implications involved with Pensions. And everyone’s circumstances and needs are different, so for something as important as retirement it really is recommended to seek out a financial adviser. There’s more detail to the Pension Lifetime Allowance that will be specific to your set of circumstances, so get that expert advice on how to do more with your money.
To recap:
- The Pension Lifetime Allowance is a limit on the amount of Pension benefit that can be drawn from Pension schemes – whether lump sums or retirement income.
- The lifetime allowance for the tax year 2021/22 is £1,073,100 and it will remain at the current level to 2025/26, and won’t be rising in line with the CPI rate of Inflation.
- It may be the case that this doesn’t affect some investors, but if your Pension is approaching the lifetime allowance then you should speak to a financial adviser.
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