The value of your investment can go down as well as up and you may get back less than you paid in. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK also have an impact on tax treatment.

What is the lifetime allowance?

Pensions can be 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. You can save more. You will only start paying the extra tax when you take more than your allowance from your pension – not just when your pension pot reaches it.

So, if you’re approaching the lifetime allowance you need to know how tax is going to affect you. You might want to think about other ways of saving for retirement, although, it may still make sense to keep saving into your pension.

The lifetime allowance applies to all your personal and workplace pensions but any overseas pensions and your State Pension are not included.

Listen to our special Lifetime allowance MoneyPlus recording.

How much is the lifetime allowance?

  • The standard lifetime allowance is £1,073,100 for the 2020/2021 tax year
  • It goes up with inflation each year

Pension lifetime allowance protection

You may be able to get a higher allowance. You need to apply to HM Revenue & Customs for lifetime allowance protection.

Find out more about this on the government's website .

What is the lifetime allowance charge?

The tax charge only takes effect when you take your pension savings, or when you reach 75. The charge only applies to the amount of money you take over the lifetime allowance. The charge you pay depends on the way you take the money out of your pension.

  • Take the excess as pension income and the charge is 25%. You may also pay income tax on any taxable money you take
  • Take the excess as a lump sum and the charge is 55% but you won't pay any income tax

What happens if you don't take your pension?

If you haven't taken any of your pension savings by the time you reach 75, you will need to pay a tax charge of 25% on anything that is over the lifetime allowance that applies at that point.

If you haven't taken your pension savings and you die before 75, any death benefits that exceed the lifetime allowance at that point will have a tax charge. It will depend on how these are paid - as a lump sum (55%) or pension income (25%).

Find out if you're close to reaching the lifetime allowance

You can check how much is in all your pensions through your provider. Or you can get in touch with your financial adviser.

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 other pensions might have valuable guarantees and benefits you might lose if you transfer.

Learn more about bringing your pensions together

What you can do if you're approaching your lifetime allowance

You might think about stopping payments so that you don’t pay the lifetime allowance charge. But this might not be the right thing for you.

Your pension could still be the best place to save for your retirement.

1. You could keep getting your employer’s payments

If you keep saving into your workplace pension, you’ll keep getting employer payments. Plus, you might get other benefits, such as life cover. You might also be able to agree an alternative with your employer and see how it compares to paying into your pension.

2. Compare your tax charge

The lifetime allowance tax charge effectively gets the tax relief back from anything in your pension that’s over your lifetime allowance. This could be less than the tax relief you got when you paid money into your pension. So the tax relief may be more than the tax charge.

3. The standard lifetime allowance rises with inflation

The annual inflation increase means the allowance will grow each tax year. You need to think about 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 usually won't pay the lifetime allowance charge until you start taking money above the limit. You can manage how and when you take money from your pension and delay when you might need to pay it.

5. Your pension has many tax benefits

  • Your pension has the potential to keep growing, free from UK tax on income and gains. However, the value can also go down and you may end up with less money than you put in.
  • You can sometimes pass your pension on to your beneficiaries, without income tax.
  • Pensions are normally free from inheritance tax. This makes them a very tax-efficient way to pass on your wealth.

Read our guide: Passing on your wealth tax efficiently.

Not sure what to do next?

Get some expert advice

Getting a better understanding of your finances and speaking with an expert is a great way to build your confidence and help you make the right decisions.

Visit our advice page to find out more

Get free impartial guidance

Visit Pension Wise or call 0800 138 3944 for free impartial guidance face to face or over the phone (call charges can vary). You can also take a look at the Money Advice Service for more guidance.

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More about pensions

We want to help you get the most out of your pension. We have guides, tools, articles and more to help you understand how pensions work and how to keep your savings on track.