The Lifetime Allowance (LTA) was introduced in 2006 as the capital limit on your tax efficient pension benefits. Benefits in excess of the Lifetime Allowance will be subject to a ‘Lifetime Allowance Charge’.
The big change from the budget is that the LTA will no longer receive inflationary increases until 2026. While this announcement may not create an immediate tax charge, it will cause many more people to exceed the LTA in the future.
Tax Year | Lifetime Allowance |
2020/21 – 2025/26 | £1,073,100 |
2019/20 | £1,055,000 |
2018/19 | £1,030,000 |
2017/18 | £1,000,000 |
2016/17 | £1,000,000 |
2015/16 | £1,250,000 |
2014/15 | £1,250,000 |
2013/14 | £1,500,000 |
2012/13 | £1,500,000 |
2011/12 | £1,800,000 |
2010/11 | £1,800,000 |
2009/10 | £1,750,000 |
2008/09 | £1,650,000 |
2007/09 | £1,600,000 |
2006/07 | £1,500,000 |
The first method of paying is just deducting a 55% tax charge and being paid the rest out of the pension. For example, if your pensions are worth £100k more than your available LTA, a tax charge of up to £55k would be due and you would receive £45k after paying the charge.
The other option is to have a 25% charge deducted in the pension and then pay Income Tax when drawing what is left. If you pay 40% Income Tax after a 25% LTA charge, this still works out to be 55% in total (because it is a percentage of a percentage).
For example, taking the same £100k excess, this becomes £75k after deducting the 25% LTA charge. Paying 40% Income Tax on drawing £75k gives an Income Tax bill of £30k. This leaves you with the same £45k in hand, after paying a total of £55k (55%) in tax.
In addition, the maximum tax-free cash you can take from a pension is 25% of your remaining LTA, so no tax-free cash is available on excess benefits.
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Defined Contribution pensions (e.g. pot of invested money) are the easiest to value – it is just the value of the underlying investments. E.g. £100k of defined contribution pension is £100k to test against the LTA.
Defined Benefit schemes (Final Salary/Career Average/Scheme Pensions), which offer a promise of income from a certain age are valued as 20x the income payable, plus any tax-free cash. For example, if a pension paid £10k per annum plus a tax-free lump sum on retirement, this would be valued as £10k x 20 + £30k = £230k.
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Whatever happens, your pensions will be tested against the LTA. If you use drawdown, your benefits will be tested twice, first when you access them and then at the of age 75 or death. It is vital then that you continue monitoring your pensions against the LTA and plan your income accordingly.
There is a joint and several liability between the scheme administrator and the member. The LTA tax charge is usually paid from the pension itself. You then have to inform HMRC of the tax charge by your self-assessment tax return.
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When you take benefits from your pension, they use up a percentage of the LTA at that time. For example, if you took £150,000 of benefits back when the Lifetime Allowance was £1.5million, this would have used 10% of your Lifetime Allowance. You should therefore have 90% of the current LTA remaining today (90% of £1,073,100 = £965,790).
Anyone whose benefits could increase above £1million could be affected. This includes:
There are ways that you can reduce your LTA tax liabilities, but there is no one-size-fits-all solution. The right course of action depends on your circumstances and the type of pensions you have. Some options could include:
While media coverage has largely focused on the freezing of the Lifetime Allowance, the government has also announced a consultation confirming they will be increasing the minimum access age of pensions to 57 by 2028. If you were born in 1971 or later then you may have to wait longer before you can access your pensions.
When considering the transfer of defined benefit pensions, you need to consider whether the transfer could increase LTA charges and conduct the analysis on the net value of the transfer.
It is important that you get the right advice when considering your options, as planning for the Lifetime Allowance will inevitably have knock-on effects for other taxes like Income Tax, Inheritance Tax, and Capital Gains Tax.
If you have any further questions about the change and impact on your pension, please get in touch today via the button below.
Whatever it is that you’re aiming for in your retirement, it helps to consider your options as early as possible. There’s no reason to leave anything off the table – with the right planning and support, you can set your goals high, knowing that you’ve got a solid plan of action to achieve them.
Pensions are a tax-efficient way to save. An individual receives tax relief on the money paid in, tax-free growth during the period that they hold a pension, and the ability to access money tax-efficiently in retirement (a combination of tax-free cash and taxable income). There is no limit on how much can be built up within pensions, however taxes may be applied upon drawdown.
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