Understanding the pension lifetime allowance is essential for any individual planning their retirement.
It’s applicable to the limit on the total amount of pension benefits an individual can accumulate throughout their lifetime while still receiving the maximum available tax relief.
For this reason the pension lifetime allowance is a crucial aspect of retirement planning because it can significantly impact your financial future.
It’s expected that the government will make an announcement in the spring 2023 finance bill to abolish the pension lifetime allowance in full from April 2024.
What is the pension lifetime allowance?
The pension lifetime allowance is a limit set by the UK government on the total value of pension benefits that an individual can accumulate tax efficiently throughout their lifetime.
This includes any pension schemes they may be enrolled in such as defined benefit (final salary or career average) schemes and defined contribution schemes.
The state pension is not applicable to any LTA calculations.
How much is the pension lifetime allowance?
For the tax year 2023/24 the pension lifetime allowance for most people is £1,073,100.
Is the LTA the same as the annual pension allowance?
The LTA is different to the annual pension allowance.
The annual allowance refers to the cap on the amount of money you can add to your pension pot each tax year and still receive tax relief.
You can still contribute more to your pension(s) but any amounts exceeding the annual allowance won’t be eligible for tax relief.
When does the pension lifetime allowance apply?
Checks are carried out at certain times to determine if the value of an individual’s pension benefits exceeds the lifetime allowance.
Most checks against the LTA are carried out before the age of 75.
If the value of a person’s pension benefits is found to be greater than the lifetime allowance when a check is carried out income tax may be payable to HMRC.
Checks are usually performed in the following circumstances:
- When you start drawing a defined benefit pension.
- When a lump sum from a defined contribution pension is taken.
- When an income is taken from a defined benefit pension.
- If you transfer a pension outside the UK before the age of 75.
- If you turn 75 and have a pension in a drawdown status.
- If you turn 75 and have a pension you haven’t used.
Does the pension lifetime allowance apply to me?
To determine if the pension lifetime allowance applies to you you must add up the expected value of your pensions and compare it against the lifetime allowance.
It’s important to consider the value of your pensions at the time the checks are carried out as the value may change between now and then.
For defined benefit pension schemes you calculate the total value by multiplying your expected annual pension by 20 and adding the amount of any separate tax free cash lump sum.
For defined contribution pension schemes the value is the total amount in your pension pots. A test is carried out each time you access money from a pension pot you haven’t yet touched.
What is a pension lifetime allowance charge?
The UK government announced changes to the pension lifetime allowance in March 2023.
These changes include the removal of the lifetime allowance charge and the introduction of income tax payable on certain lump sum payments.
In previous tax years an LTA charge was applied to any pension savings exceeding this amount.
As of 6 April 2023 this charge has been reduced to 0%. Instead certain lump sum payments which would have been subject to a lifetime allowance charge will now be subject to income tax at the recipient’s marginal rate.
The lifetime allowance charge is due to be abolished from April 2024.
How much tax do I pay if I go over the pension lifetime allowance?
Payments that would have been subject to the now abolished lifetime allowance charge will now be taxed at your marginal rate of income tax.
This is only in cases where the PLA has been exceeded and means the maximum amount you can normally take as tax free cash will be frozen at £268,275 which is 25% of the lifetime allowance.
Report tax due on your self assessment tax return
Your pension provider will issue a statement informing you of the tax amount due if your lifetime allowance is exceeded.
The tax will be withheld by your pension provider prior to receiving your pension payments. To report the deducted tax to HMRC you should complete a self assessment tax return.
For pensions initiated on or after April 6 2023 there will be no lifetime allowance tax charge and reporting the deducted tax on a self assessment tax return is not required.
Protecting your pension lifetime allowance
If you have sizeable pensions and expect your pension savings to exceed the lifetime allowance threshold you may consider applying for protection.
You can apply for protection schemes such as individual protection 2016 and fixed protection 2016.
Individual protection 2016 is available in circumstances where the value of pension savings on 5 April 2016 exceeded £1 million.
The protection schemes are available to help you avoid a tax charge by offering you a higher lifetime allowance.
These protections allow you to potentially receive a tax free lump sum payment higher than the current limit of £268,275.
Applying for pension lifetime allowance protections
You can apply for and check protections from the reductions in the lifetime allowance with HM Revenue and Customs (HMRC) by logging in to your government gateway account.
If you’re unable to use the online service you can call HMRC’s pensions helpline for applications on 0300 123 1079.
There’s typically no application deadline for these protections but you must have applied and received a reference number from HMRC before your pension is tested against the lifetime allowance.
Pension tax advice
By understanding the pension LTA, staying informed about changes and seeking professional advice if needed you can effectively manage your pension savings to help ensure a comfortable retirement.
The pension lifetime allowance and it’s implications can quickly become complex so if you believe your pensions are likely to exceed the lifetime allowance it’s a good idea to consider specialist tax advice or speak with a regulated financial adviser.
