Pensions advice: lifetime allowance charge examples


Searching for lifetime allowance tax examples? Our short guide will help to set you straight on one of the more confusing parts of personal pensions.

As the government so often reminds us, saving for your future is important. But saving too much into your pension schemes can incur some hefty tax charges. For that you can thank the lifetime allowance. And if you want to save efficiently for your retirement, it’s worth knowing where you stand.  

How much is the lifetime allowance?

The lifetime allowance is capped at £1,055,000 for the 2019-2020 tax year. This cap applies to the total value of all your pension schemes – excluding your state pension. Any funds that exclude the cap will incur additional tax charges.

Defined contribution versus defined benefit

For defined contribution schemes, the value of your benefits will be the value of your pension pot used to fund your retirement income plus any lump sum. As for defined benefit schemes, multiply your expected annual pension by 20 to arrive at the value. Be sure to add any tax-free cash lump sum if it is additional to the pension. When you begin taking money from your pension, your scheme provider should give you a statement to show you how much of your lifetime allowance you are using up.

Lifetime allowance charge examples

If the total value of payouts from your pension pots goes beyond the lifetime allowance, you will have to pay additional tax on the excess. The fee charged depends on whether you are taking a lump sum from your pension or using it for regular retirement income.

Lump sums will be taxed at 55%, while regular income will be charged at 25%. Note that this is on top of any regular tax payable on your pension income.

For example let’s say you have a single defined contribution pension with a total value of £1,400,000. That exceeds the 2019/2020 lifetime allowance by £345,000 and will incur additional tax charges.

Have you already utilised part of your pension?

The lifetime allowance changes each tax year. Therefore if you have already been drawing on your pension for a number of years, it will be necessary to calculate your tax liabilities based on the lifetime allowance in previous tax years. It can get complicated, but a good financial adviser will be able to help you.

What happens if you die before taking your pension?

If you die before the age of 75 and have yet to begin drawing your pension, it can be passed on to your beneficiaries. However the lifetime allowance charges will still be applicable.

Make your money work harder for your future

It goes without saying that you want a comfortable retirement. But if you want your money to work as hard as possible for your future, it may be worth looking at alternatives to pension contributions once your pot has reached a certain value.

Here at Prydis our wealth management and tax advisers have helped thousands of people make confident decisions about their financial future. If you would like to find out more about how we could help you, get in touch for an informal conversation about your ambitions.

James Priday

This article was written by James Priday

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