The lifetime allowance is a limit on the value of payouts from your pension schemes- whether lump sums or retirement income- that can be made without triggering extra tax charge.
More people are affected by the charge as the pension lifetime allowance decreases.
How much is the Lifetime Allowance?
The lifetime allowance for most people is £1million in the tax year 2017-18
It applies to the total amount of pensions you have, excluding State Pension
HMRC rules require Defined Benefit Schemes to multiply the annual pension by a factor of 20 when calculating the capital amount to be assessed against the lifetime allowance.
Once you are looking at retiring on an income of £50,000 a year, your pension will be valued around £1million.
How does the lifetime allowance tax charge work?
- 55% of any amount you take from your pension savings as a lump sum that is over the lifetime allowance.
- 25% of any amount of savings you take as a pension income that is over the lifetime allowance.
- You only start paying lifetime allowance tax charge when you are accessing your pension and the benefits exceed £1million, and it is the benefits over £1million threshold you pay tax on.
Our financial advisors will gain a holistic understanding of your situation when compiling a recommendation as to whether it would be better for you to take benefits that are more than your lifetime allowance.
- Your age
- State of health
- Whether you are married and have dependants
- If you have mortgage/debts
- Your level of expenditure
Circumstances and life plans vary, it is not always the case that the 55% tax rate should prevent you from taking your excess savings as a lump sum. If the Defined Benefit is transferred into a Defined Contribution scheme and put into drawdown, they will be exempt from inheritance tax.
Ultimately, there is no one-size- fits all approach when advising clients who have pension benefits more than the lifetime allowance. Instead, we will base our recommendations on the client's individual circumstances.