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Getting to grips with the pension lifetime allowance

The Lifetime Allowance for pension savings brings plenty of challenges

By Matthew Lewis, Chartered Financial Planner EQ Investors

What is the Lifetime Allowance?

The Lifetime Allowance is the maximum amount you can save into a pension without incurring a tax charge. It’s generally tested when you draw your pension, reach age 75, or on death. The consequence of exceeding the allowance is a large tax charge, potentially as high as 55%.

Whilst the Lifetime Allowance has started to rise again with inflation, it remains significantly lower its peak of £1,800,000 in 2011/12. The current standard Lifetime Allowance stands at just £1,073,100. Whilst a million pounds is clearly a significant amount, you’d be surprised at how many pension funds reach this value. You might well find this to be a problem if you have a final salary pension. Despite recent changes announced in the Budget, doctors should still plan ahead carefully.

A growing issue

Figures from HMRC showed that 4,500 pension savers fell foul of their lifetime allowance in the 2017-18 financial year (the most recent data available), excess charges totaled £185 million, up from £144 million the previous year.

How do I obtain a higher personalised lifetime allowance?

Individual Protection 2016 (IP2016) is available to anyone who had pension savings over £1m on 5 April 2016. The personalised allowance is the lower of either the value of existing pension savings or £1.25m. Potentially the standard lifetime allowance could exceed your personalised lifetime allowance in the future. If this is the case, you will receive the higher standard allowance.

The advantage of IP2016 over Fixed Protection 2016 (which gives an allowance of £1.25 million) is that you can continue to fund your pension. Fixed Protection 2016 is lost if you or your employer makes pensions contributions. Therefore, IP2016 might be worth considering if your employer is not willing to provide alternative remuneration to pension contributions.

What do you need to know?

The government has tried to make the process straightforward, but you will need to work out four numbers:

  1. Pensions already in payment before 6 April 2006
  2. Pensions which have been tested against the Lifetime Allowance between 6 April 2006 and 5 April 2016
  3. Pensions not yet taken
  4. Contributions (which gained UK tax relief) put into overseas pensions between 6 April 2006 and 5 April 2016

At the moment, picking up these numbers can be as simple as writing to your pension provider. They are required to send you the information within three months.

There is no deadline for you to apply, but the regulations for pension providers to hold the data have now lapsed since 6 April 2020. Leaving this further will only make it harder to secure the pension data you need. Legislation only required pension providers provide this assistance if you ask, in writing, before 6 April 2020. Even though this date has passed, acting now could help you no end.

What should you do if you think this might be a problem?

The first step is to find out what the problem is, do this by writing to your pension provider(s) requesting the information.

Our team of financial planners can help you understand what you receive and take stock of your position. By looking at your pensions in the light of your objectives and other wealth, we can help build a plan of what you should do. Independent research has shown that by engaging with a financial planner to help you make good decisions you can potentially increase your wealth.