Pensions are the most tax-efficient way of saving for your retirement.

You can save as much as you want but there is a Lifetime Allowance on those savings, above which there may be extra tax charges.

It's not a limit, but when you’re approaching the Lifetime Allowance you should look at what the tax treatment could be and how this compares with other ways to save for retirement.

It may 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 £1,055,000 since 5 April 2019.
  • 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 – and how you take those pension savings matters.

  • Take those savings as pension income and the charge is 25%. You also pay any income tax due on top of this
  • Take those savings as a lump sum and the charge is 55%.

If you don't access your pension, what happens?

The Lifetime Allowance tax charge is also payable should you die before taking your pension savings and it’s paid at the same rates, as above.

If your beneficiaries choose the lump sum option, the full amount will be paid out and they will then need to pay the Lifetime Allowance tax charge.

Find out if this could affect you

Check the value of your pensions online or contact your 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.

Read our guide: Passing on your wealth tax efficiently.

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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 February 2019 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 may 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 - it’s time to choose

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