Insight: The Lifetime Allowance

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. 

Key Considerations:

  • 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. 

​This January we are offering a limited amount of Complimentary Retirement Reviews. For more information & to book a review, please visit our Retirement Review Page. 

If you have any further questions, or for more advice, get in contact with us today!​

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About the Author

By Nigel Reeves: My mission is to provide the quality, honest & jargon-free pension advice that people need to secure the retirement they deserve. At home, I'm a family man and an active supporter of grassroots sports!

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