Pensions are tax advantaged investments and the lifetime allowance limits the amount that can be built up. Total pension savings exceeding the current limit of £1,073,100 will be taxed – a Lifetime Allowance Charge.

You may decide to withdraw any excess savings as

  • a cash lump sum. These excess savings will be taxed at 55%.
  • A pension income. These are taxed at 25% PLUS income tax at your highest rate.

For example, if you have pension savings totalling £1,573,100, withdrawing all excess savings (£500,000) as a cash lump sum would mean you receive £225,000:

£500,000 x 45% = £225,000

These tax charges could mean significant costs to managing your pensions.

When will your savings be taxed?

Simply having pension savings worth more than the lifetime allowance will not trigger a lifetime allowance charge. Pensions are only tested against the lifetime allowance when you take money out. There are many times when this happens but the most typical are:

  • Reaching the age of 75
  • Withdrawing pension savings
  • Passing away before the age of 75

A full list of these events can be found here: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088100

A withdrawal simply triggers a test to see if the amounts you have withdrawn exceed the lifetime allowance. You could make many withdrawals without suffering an additional tax charge.

It may be possible to apply for a higher lifetime allowance, depending on your circumstances.

To see if you are eligible, get in touch with your financial adviser!

Should you avoid surpassing the lifetime allowance?

Considering the extortionate tax rates on excess pension savings, you may wish to slow down your pension contributions to avoid any charges.

BUT there are many scenarios in which easing contributions may prove counterproductive:

  • Illness or redundancy may force you to retire early, in which case you will have needlessly stopped saving tax-efficiently.
  • If your income is between £100,000 – £125,140, it is more tax-efficient to contribute up to £25,140 into your pension to avoid losing the personal allowance.
  • Even if you restrict contributions, you may reach the limit anyway, simply through growth. Take someone that stops all contributions to their £800,000 pension pot offering a 5% return. Their pension savings will breach the lifetime allowance limit in just over 6 years.

Ultimately, what you decide to do with your pension savings is personal and often specific to your situation.

Navigating the complex world of pension tax relief is a lot easier with a qualified financial adviser, so do not hesitate to get in touch!

You can contact mark Beresford by emailing [email protected], or calling 01252 713645 or 07500720938