Pensions are the most tax-efficient way to save for retirement.
You can save as much as you want into your pension. But there is a Lifetime Allowance on those savings.
It's not a limit, but when you’re approaching the Lifetime Allowance you should be aware of the tax implications and how these compare with other ways to save for retirement.
It may still make sense to keep saving into your pension.
How much is the Lifetime Allowance?
All your pensions, including workplace pensions, count towards the Lifetime Allowance - except the State Pension and overseas pensions.
- The standard Lifetime Allowance is £1,073,100 since 6 April 2020
- It increases with inflation each year
You may get a higher allowance by applying for protection from Her Majesty’s Revenue & Customs (HMRC).
Find out more about this on the Government’s website.
How much is the Lifetime Allowance tax charge?
You don’t pay the tax charge until you take your pension savings over and above your Lifetime Allowance (or reach age 75, if earlier). The charge is only on the excess money saved in your pension that is above your Lifetime Allowance. How you take out any excess money matters.
- Take the excess as pension income and the charge is 25%. You also pay any income tax on the balance
- Take the excess as a lump sum and the charge is 55%
- If tested at age 75, the Lifetime Allowance tax charge will always be 25%
If you don't access your pension, what happens?
If you haven't accessed your pension savings by age 75, they will be tested against your Lifetime Allowance at that time. This means that you will need to pay a tax charge of 25% on any excess money saved that is over the Lifetime Allowance.
If you haven't accessed your pension savings and die before age 75, the death benefits paid to your beneficiaries will normally be tested against your Lifetime Allowance. Any tax charge due will be at the rates mentioned above, depending on whether or not the death benefits are paid as a lump sum or pension income.
Find out if you're close to reaching the Lifetime Allowance
You can check the value of your pensions online or by contacting your financial adviser. It’s important to plan carefully so that you understand what the tax implications could be if and when you come to take the excess.
If you have several pensions, bringing them together into one plan could make it easier to keep track, although combining pensions is not right for everyone.
Your existing pensions may have valuable benefits or guarantees you would not want to give up.
Take financial advice on this to keep you right.
What you can do if you're approaching your Lifetime Allowance
You might consider stopping payments so that you don’t pay the Lifetime Allowance charge, although this may not be the right thing for you.
Your pension could still be the best place to save for your retirement.
1. You could keep employer contributions
Keep saving into a workplace pension and you continue to get any employer payments or other benefits such as life cover. Do check if any alternative remuneration or reward is offered instead – and how it compares.
2. You continue to benefit from tax relief
The Lifetime Allowance tax charge recovers tax relief on the value of your pension funds over your Lifetime Allowance when you take them. This could be less than the tax relief you received when you paid into your pension.
3. The Lifetime Allowance rises with inflation
The annual inflation increase means the allowance grows. You need to consider what the Lifetime Allowance could be when it’s time to take your pension savings.
4. You can control when you pay the Lifetime Allowance charge
You don’t pay it until after you’ve taken your savings up to the Lifetime Allowance. Managing how and when you take your pension savings can delay when you might need to pay it.
Phase your tax-free cash and income over a period of time, rather than in one go, and you could take advantage of the increasing Lifetime Allowance.
5. Your pension has many tax benefits
- Your pension fund has the potential to keep growing free of UK tax on income and gains
- Can sometimes be passed on to your beneficiaries, free of income tax
- Pensions are normally free of inheritance tax, which makes them a very tax-efficient way to pass wealth on
Not sure what to do next?
If you're unsure if you're reaching your Lifetime Allowance it could be worth taking financial advice.
Personal and workplace pensions are an investment, the value can go down as well as up and you could get back less than you paid in.
Remember, tax rules and legislation can change and the value of tax benefits depends on your individual circumstances. This information is based on our understanding in April 2020. Some of the suggestions in this guide will not be right for everyone and you need to consider all the facts before making any decision.
Access to impartial guidance
We recommend you seek appropriate guidance or advice before you make any decisions. An adviser is likely to charge a fee for this. You can also get free impartial guidance over the phone or face to face with Pensionwise. Go to pensionwise.gov.uk or call 0800 138 3944. Make sure you understand all your retirement options by reading the Money Advice Service guide – Your pension: your choices
Keep up-to date with the latest retirement news and expert opinion.