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Does the lifetime allowance affect you?

lifetime allowance

In 2006 the lifetime allowance was introduced. The lifetime allowance limits the amount of pension benefits you can draw from your pension schemes before triggering an extra tax charge. It started at £1.5million, increased gradually to £1.8million and then reduced to £1.25 million and again to the current amount of £1 million.

The lifetime allowance is your pension value including growth so if you are close to the allowance, you may need to take action. If you exceed your lifetime allowance then you are liable for up to 55% tax on anything over this amount, so it’s worth understanding if you could be affected.

If your pension pot is nearing this amount then you should stop contributing to any schemes and consider other options instead. It is possible to protect your pot from further reductions or keep a higher allowance and a financial adviser will explain how to do this.




How do you know if you are likely to exceed the lifetime allowance?  For defined contribution pension pots this is the amount that goes towards paying you, whether you take it as a lump sum or as income. For defined benefit pension schemes this is worked out as 20 x your first year pension plus any lump sum.

You may think you are unlikely to exceed the lifetime allowance limit, but pensions are a long term commitment and even paying in modest amounts can certainly add up. For anyone coming up to retirement age it is definitely worth evaluating the value of all your pension pots and making sure you aren’t going to exceed the lifetime allowance.

If you have a final salary pension, the calculations may be a little more complicated but it is still possible to work out whether you are likely to trigger the lifetime allowance. If you are, then you can start to put measures in place to protect this. If in 2016-2017 you are on track for a final salary pension of £50,000 with no separate lump sum, then it is likely you’ll be affected by the lifetime allowance. This is just a guide so we do recommend seeking advice if you aren’t sure where you stand.

Understanding your pension and any tax implications is important if you want to get the best from your pension. Protecting your future finances and securing a stable income for later life should be something you start thinking about now.

If you aren’t sure what your financial future looks like then getting independent financial advice will put your mind at ease. Having accurate information and guidance on how to invest in your future will put you on the right track to ensuring the best for you and your family.

Rockwood Financial Solutions are independent financial advisers who strongly believe in helping clients build the best financial strategies for their personal circumstances. If you want help planning for your future then we’d love to hear from you. We can advise on any aspect of financial planning, including how the lifetime allowance could affect you and what you can do to minimise the risk. Contact us today for more information.

Nothing in this blog constitutes financial advice or recommendations, for more information please contact Rockwood Financial Solutions on 0330 332 2679.