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Lifetime allowance - how to prevent 55% tax on your pension

What are your options if you’re affected by the lifetime allowance?

Free factsheet download

The lifetime allowance is a cap on the total you can hold in pensions without incurring a tax charge. The lifetime allowance fell to £1 million on 6 April 2016, meaning it could apply to an estimated 460,000 people. If the value of your pensions exceeds the lifetime allowance, any excess could be taxed at up to 55%. The charge doesn’t just relate to the contributions you have made to your pensions; it applies if the total value of your combined pension pots is above £1 million.

Find out more: Free lifetime allowance factsheet

Pensions are measured against this limit whenever you take benefits and/or reach age 75. If you think your pensions, including the value of any final salary schemes, will be worth more than £1 million by the time you retire or reach age 75 or were worth more than £1 million on 5 April 2016, you might be able to register for a form of protection to increase your lifetime allowance.

Below we explain what action you could consider to protect your pension.

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Will my pension be worth £1 million?

The amount measured against the lifetime allowance is the total value of your pensions, not the amount paid in. As a pension is often a long-term investment, the amount added by any investment growth can be significant, although there are no guarantees – the value of investments can fall as well as rise so you may get back less than you invest.

Final salary pensions also count towards the limit and can be surprisingly large. For example, a final salary pension that will pay £25,000 a year is equivalent to £500,000 or more – the annual pension is multiplied by 20 and any additional lump sum should be added. The State Pension is not tested against the lifetime allowance.

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Is your pension pot edging towards the lifetime allowance?

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How can I protect my pension?

If you think you might be affected by the reduced lifetime allowance, you may be able to apply for a higher allowance. There are two forms of protection still available:

Fixed Protection 2016

This gives you a £1.25 million lifetime allowance, but you can only apply for this if no pension contributions have been made to any of your pension plans after 5 April 2016. This includes personal and employer contributions and also includes building up further benefits in a final salary scheme.

Individual Protection 2016

If your pensions were worth more than £1 million on 5 April 2016, you might be able to apply for Individual Protection 2016. You will have a personal lifetime allowance of the value of your pensions at 5 April 2016, up to a maximum of £1.25 million. For example, if your pensions were worth £1.1 million on 5 April 2016, your personal lifetime allowance will be £1.1 million. You can continue to make and receive contributions, but any benefits you take in excess of your personal lifetime allowance will be subject to a tax charge.

You can apply online for both types. Tax rules can change and benefits depend on your circumstances.

Find out more about applying for protection

Should I apply for protection?

Pension rules are complex, so this checklist might help if you think you could be caught by the lower allowance. However, there may be other factors to consider, particularly if you already have lifetime allowance protection – make sure you download the lifetime allowance factsheet for all the details.

  • If your pensions were worth more than £1 million on 5 April 2016, consider applying for Individual Protection 2016.
  • If you haven’t made any contributions since 5 April 2016, and don’t plan on making any more, consider applying for Fixed Protection 2016.

How could my pension be taxed at retirement?

Find out how pension withdrawals might be taxed, and how with a little planning, investors can reduce the amount of tax they pay on pension withdrawals

Find out now

Take financial advice: it could make a huge difference

The lifetime allowance is a complex area, so anyone close to the limit should think carefully about getting expert advice before proceeding. An adviser can help you decide if you should apply for protection and highlight other opportunities – for example, under current rules some investors can take up to £30,000 from their pensions without it being tested against the lifetime allowance.

Find out more about expert advice from Hargreaves Lansdown

Ultimately the decision will depend on your circumstances. If you are unsure then you should seek advice because neither this article nor the factsheet are able to take your situation into account.

What could investors consider now?

Investors with multiple pension pots could also consider consolidating them. Being able to get an exact value quickly, rather than having to contact several different providers, could make the decision of whether or not to apply for protection simpler.

With our Vantage SIPP (Self Invested Personal Pension) you can get an up-to-date valuation anytime by logging in to our website or calling our Bristol-based Helpdesk. There are no transfer-in costs and we arrange the transfer for you, but you should first check you won’t lose any valuable guarantees or benefits or incur excessive exit fees.

The Vantage SIPP is designed for investors who are happy making their own investment decisions and manage their own pension without personal financial advice. Unless otherwise arranged, pensions are transferred as cash which means the value will not be affected by market rises or falls for a period.

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Have a question?

0117 980 9926