Lifetime allowance

Lifetime allowance is the overall limit of tax privilege funds an individual can accrue before a tax (lifetime allowance tax) is applied. This applies to all of the members benefits across all of their UK schemes (excluding state pension). 

For those with large pension plans lifetime allowance is an additional, unwanted tax but with some planning this can often be eradicated.

Reducing amount

Since its introduction the maximum lifetime allowance has considerably reduced:

Tax year                                                                                 Standard lifetime allowance

2019/2020                                                                              £1,055,000 

2018/2019                                                                              £1,030,000 

2017/2018                                                                              £1,000,000 

2016/2017                                                                              £1,000,000

2015/2016                                                                              £1,250,000

2014/2015                                                                              £1,250,000

2013/2014                                                                              £1,500,000

2012/2013                                                                              £1,500,000

2011/2012                                                                              £1,800,000

2010/2011                                                                              £1,800,000

2009/2010                                                                              £1,750,000

2008/2009                                                                              £1,650,000

2007/2008                                                                              £1,600,000

2006/2007                                                                              £1,500,000 

Will my pension be affected by lifetime allowance

When assessing the probability of being affected by lifetime allowance we need to take into consideration current age, retirement age, expected growth rates, current contribution amount and current value of pension. In the below example we have assume growth rates of 5%, no further contributions and retirement at age 65. 

Current Age                          Current Pension Value                   Value at age 65

30                                                £200,000                                                £1,100,000

40                                                £300,000                                                £1,015,000

50                                                £500,000                                                £1,039,000

When will I best tested against the lifetime allowance limit

Testing of benefits is done at Benefit Crystallisation Events (BCE). The total value plus withdrawals will be taken into consideration .  These events are:

• Taking pensions – the total value of the amounts moved into a drawdown pension. For a final salary scheme it is 20x the first annual pension amount.
• Pension Commencement Lump Sum (PCLS) – client will crystallise the pot up to 4x the amount of PCLS taken.
• Age 75 – any uncrystallised funds are tested against lifetime allowance
• Death – all funds are retested against lifetime allowance. To include withdrawals plus remaining value.
• Transfer to Recognised Overseas Pension (ROPs) - all funds are tested at point of transfer

Members lifetime allowance is cumulative across different events. Example: Member drawdown of a company pensions pot of £500,000 using 47.39% of their lifetime allowance. Member then transfers their private pension worth £750,000 to a ROPs. This event would be 71.09% of a members lifetime allowance but the member only has 52.61% remaining after they designated their £500,000 scheme to drawdown. Therefore the client would have a tax charge for any amount transferred above the lifetime allowance - £195,000.