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Pension lifetime

How to avoid a 55% tax charge

Important information: Pension and tax rules can change and any benefits will depend on your circumstances. If you’re unsure about what’s right for your situation, please seek personal advice. For complex taxation needs please consult an accountant.

What is the lifetime allowance?

The lifetime allowance is the limit on the value of pension benefits you can build up during your lifetime without paying a tax charge. This is currently £1,073,100.

The lifetime allowance has changed over the years, however the government has announced that it will be frozen at its current level until at least April 2026.

The allowance doesn’t just relate to the money you’ve paid into your pension, but rather the total value of all your pension pots, including any growth.

Please remember that tax rules change and benefits depend on your circumstances.

The current lifetime allowance £1,073,100

What is the lifetime allowance charge?

If you go over the pension lifetime allowance, you’ll trigger a tax charge of up to 55% on the excess.

Occasions when your pensions are measured against this limit include when you access pension money and/or reach age 75. This is when the charge will be applied.

To find out how much your pension could be worth, why not use our pension calculator. Just remember to remove the State Pension from the calculation as this doesn’t count towards the lifetime allowance.

Try our pension calculator

How to beat the lifetime allowance

If you think you could be affected by the lifetime allowance, you might be able to register for lifetime allowance protection. This could mean that your lifetime allowance is increased, either reducing or eliminating the tax charge.

There are two types of lifetime allowance protection available - and you can apply for both online via HMRC’s website:

Fixed protection

If you haven’t made any contributions to any of your pensions since 5 April 2016 you could apply for Fixed Protection 2016. This will mean your lifetime allowance is fixed at £1.25m.

This includes both personal and employer contributions, and any further benefit accrual in a defined benefit (e.g. final salary) scheme.

The catch is, if you make a contribution in the future, you’ll lose your protection, and be subject to whatever the lifetime allowance is at that time.

Individual protection

If your pensions were worth more than £1m on 5 April 2016, then you might consider applying for Individual Protection. This will mean your lifetime allowance will match whatever the value of your pensions were on that date, up to a maximum of £1.25m.

You can continue to make contributions to your pension (both personal and employer), but any value over your protected lifetime allowance will be subject to a tax charge.

Your lifetime allowance guide

The lifetime allowance is a complex rule. You can learn more about it, including the calculations you'll need to work out if you could be affected, in our lifetime allowance guide.

Would it help to talk to an adviser?

If you think you're close to the lifetime allowance, you may need personal advice when it comes to your finances and retirement planning. Book a call back with a specialist today, or explore our advisory service to see if you could benefit.

Book a call back