What is the pension lifetime allowance?
Pension contributions are one of the best ways to save money. However, you need to be careful because if the total amount is more than a specific limit, there could be hefty tax implications.
The Chancellor acclaimed in the 2023 Budget that the lifetime allowance had been stopped. However, some protections are still available.
Lifetime Allowance in Pension in 2024-25
Earlier, individuals were allowed to save up to the lifetime allowance limit in their pension account. Beyond this limit, the savings could attract heavy taxes.
However, as mentioned above, the lifetime allowance was abolished in the 2023 Budget. The previous year, 2022-23, it was £1.073m.
If we go back a bit, in 2018-19, this allowance was increased each year due to inflation. In September 2019, the inflation rate was 1.7%. This impacted the lifetime allowance limit in 2020-21, which was increased to £1,073,100. Later, in the 2021 Budget, this limit was frozen at the same amount.
The Pension Lifetime Allowance Charge
The excess amount in your pension, over and above the lifetime allowance, attracted tax charges.
The charge was 25% one-time when paid as a pension, offering the option of buying an annuity or using the drawdown plan for regular income. Else, it was 55% when paid in a lump sum.
The lifetime allowance charge could be applied either way, or a combination of both ways. It all depends on how the individual uses the excess amount.
How do you get protection for your pension lifetime allowance?
Individuals can apply to protect their pension lifetime allowance, especially from reductions that happened to the lifetime allowance previously. These reductions were available to you while you saved in your pension with a higher limit in mind.
You can choose from 2 types of protection for tax years that have gone by
.
- Individual protection 2016
If your pension/ pensions were more than £1m on 5th April 2016, you are entitled to apply for this protection type. In this case, the protection of your lifetime allowance is either the £1.25m or the amount of your pension on 5th April 2016; the lower amount applies.
- Fixed protection 2016
In this type, the lifetime allowance is fixed at £1.25m. However, you are no longer allowed to make pension contributions. This option works best for individuals not interested in saving in their pension account anymore. If you continue to make contributions to the pension scheme even after fixed protection, remember that you will lose the money. To top it off, the excess amount (above £1.25m) will have tax obligations.
For personalized guidance on managing your pension contributions and lifetime allowance protections, speak to professionals like TaxCan and Cangaf Ltd. Their expertise can help you optimize your pension strategy. You can maximize tax efficiency and secure your financial future with their assistance.
Tax-free Lump Sum from Your Pension Contributions
Since 6th April 2023, the allowed tax-free lump sum withdrawal from your pension contribution is 25% of the amount. The maximum amount permissible is £268,275, 25% of the standard lifetime allowance of 2022-23.
The amount can be more than £268,275 if you have any specific lifetime allowance protection.
Fixed Protection and Lump Sums
| Fixed Protection | Tax-free Lump sum amount entitlement |
| Fixed Protection | Up to £450,000 |
| Fixed Protection 2014 | Up to £375,000 |
| Fixed Protection 2016 | Up to £312,500 |
Individual Protections and Lump Sums
For valid individual protection 2014, your lifetime allowance can be protected at either £1,500,000 or a lower amount of the total of your pension pots. In this case, you are entitled to 25% of the protected lifetime allowance as a tax-free lump sum.
For instance, your individual protection 2014 is £1,400,000; the tax-free lump sum is £350,000. In the case of valid individual protection 2016, the lifetime allowance protection will be either £1,250,000 or the lower value of the total of your pension amounts.
Your entitlement will be 25% of the protected lifetime allowance as a tax-free lump sum or 25% of the standard lifetime allowance, the option that has a higher amount.
Applying for Lifetime Allowance Protection?
The application can be either for fixed protection or individual protection at the government’s website.
Conclusion:
Understanding and managing your pension lifetime allowance is crucial to avoid significant tax implications. While recent changes have removed the limit, protections from previous thresholds remain crucial for many savers. Whether you’re safeguarding your pension or exploring options for tax-efficient withdrawals, expert advice from professionals like TaxCan and Cangaf Ltd. can provide invaluable support. They specialize in navigating these complexities, ensuring you make informed decisions to secure your financial future.
