Lifetime allowance reducing to £1 million

The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.

The lifetime allowance was introduced in 2006 at a level of £1.5 million. It then increased each year to 2010, when it reached a level of £1.8 million. Since 2010, there have been a number of pension reforms which have led to the lifetime allowance being reduced. Its current level in the 2015-16 tax year is £1.25 million and this will reduce further to £1m from April 2016.

If the total value of the payouts from your pension pots, including the value of the payouts from any defined benefit schemes, exceeds the lifetime allowance, there will be tax on the excess – called the lifetime allowance charge.

The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you – the rate is:

55% if you get it as a lump sum
25% if you get it any other way, e.g. pension payments or cash withdrawals

If the value of your pensions on 5th April 2014 was over £1.25 million, and have not applied for protection before, you may be able to apply for lifetime allowance protection up to a maximum of £1.5 million. This is called Individual Protection 2014 and must be applied for before 5th April 2017.

If the value of your pensions on 5th April 2016 is likely to be over £1 million, and have not applied for protection before, it is likely that a new Lifetime Allowance Protection 2016 will be introduced after this date. We will be in touch when further information is available, however should you wish to discuss any aspect of your pension savings, please make an appointment to come in for a chat.