Pension lifetime allowance

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

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.