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:
- 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.