Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

Pension Lifetime Allowance

From 6 April 2014 the pension lifetime allowance is reducing from £1.5 million to £1.25 million. Any excess above the lifetime allowance will be taxed at:

Emma Sterland Emma Sterland
05 November 2013
  • 55% tax charge if taken as a lump sum; or
  • 25% tax charge (plus income tax) if taken as an income

The table below highlights the potential impact to an individual with £1.5 million saved across pensions.

  Pension drawn on or before 5 April 2014 Pension drawn on or after 6 April 2014
Total Pension Accumulated £1,500,000 £1,500,000
Pension Lifetime Allowance £1,500,000 £1,250,000
Amount Exceeding Lifetime Allowance Nil £250,000
Tax Charge on Excess (55% tax – Excess Drawn as Lump Sum) Nil £137,500
Tax Charge on Excess (25% tax – Excess Drawn as Taxable Income) Nil £62,500

As you can see from the table, for an individual with £1.5 million, saved into pensions, the change in lifetime allowance could cost up to £137,500 in excess tax charges.

It is important to note that in calculating the value of your pensions compared to the lifetime allowance, all UK pension savings are taken into account, including personal pensions, workplace pensions and final salary pensions.

Apply to HMRC to protect your allowance

In order not to punish those who have already accumulated substantial pension funds, individuals are able to apply for their lifetime allowance to be ‘protected’, through ‘Fixed Protection 2014’ and ‘Individual Protection’. Either (or both) of these could help better preserve your pension savings from the potential tax impact.

Speak to us

The £1.25 million lifetime allowance sounds like a lot of money but with an existing pension fund of £750,000 and several years to go until you retire, even with modest investment returns you will be caught by the cap and should urgently consider taking out some form of protection as set out by HM Revenue & Customs. If you are affected by this, or want more information on retirement planning, please call us on 020 7189 2400. We have an extensive network of regionally based advisers and can arrange for you to meet one to talk through your options.

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