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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.
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 .
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.
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%).
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.
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.
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.
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.
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.
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.
Read our guide: Passing on your wealth tax efficiently.
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.
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.