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Lifetime Allowance Advice

You have worked hard to accumulate a sizeable pension pot and want to ensure you can access it as tax efficiently as possible in retirement. After all, ensuring you have enough money to live comfortably in retirement is of paramount importance. But there’s the issue of the lifetime allowance to consider.

The Lifetime Allowance is a limit on the amount of benefits that can be drawn from your pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge. These extra charges range from 25% if taken as a retirement income or 55% if taken as a pension commencement lump sum.

It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.

Keeping you up to date

The lifetime allowance was introduced in 2006 at a level of £1.5 million. It then increased each year to 2010, when it reached a level of £1.8 million. Since 2010, there have been a number of pension reforms which have led to the lifetime allowance being reduced. Its current level, since 6th April 2016, is £1m having been reduced from £1.25 million. From 6 April 2018, the government intends to index the standard lifetime allowance annually in line with the Consumer Prices Index (CPI).

It is easier than you may think to breach the lifetime allowance. It may be necessary to take your pension early or stop contributing to the scheme, prior to retirement, to avoid your benefits exceeding the LTA cap.

Protecting your lifetime allowance

When the lifetime allowance was introduced in 2006 and in subsequent years when it has been reduced, those with benefits valued in excess of the lifetime allowance have been able to apply for ‘protection’ to protect the value of benefits they have built up (and future benefits that may accrue) from tax charges.

These protections include

  • Primary protection
  • Enhanced protection
  • Fixed protection and
  • Individual protection

Each have different conditions attach to them so you should seek advice about your individual circumstances.