How does the lifetime pension allowance work?

The lifetime allowance is the total amount you can build up in all your pension savings without incurring a tax charge. Although there’s no limit on the amount of authorised benefits that can be provided for an individual from their registered pension schemes, there is a limit on the level of tax-privileged benefits.

What is a SIPP lifetime allowance?

The lifetime allowance is a limit to the amount you can save in your SIPP or other pension over your lifetime. The allowance is currently £1.0731 million – you will pay tax on any pension savings you make in excess of this. The excess is taxed at 25% (plus Income Tax) as income or 55% as a lump sum.

What is my lifetime allowance percentage?

The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you – the rate is: 55% if you get it as a lump sum. 25% if you get it any other way, for example pension payments or cash withdrawals.

How is the lifetime allowance charge paid?

The charge is paid on any excess over the lifetime allowance limit. The rate depends on how this excess is paid to the member of the pension scheme. It can be paid as a lump sum or taken as ‘a pension’ in the future.

How do I avoid lifetime allowance charges?

You each have a lifetime allowance, so by using both allowances you can potentially increase the amount in your pensions by 100% before paying any lifetime allowance charge. If you have a defined benefit pension, you could consider retiring early.

What happens if I exceed the lifetime allowance?

If you go over this lifetime allowance, you’ll generally pay a tax charge on the excess when you take a lump sum or income from your pension pot, transfer overseas, or reach age 75 with unused pension benefits. The excess can be paid as a lump sum, subject to a 55% tax charge.

Is it worth exceeding lifetime allowance?

It may be better to pay the 25% lifetime allowance tax charge than the 40% inheritance tax charge. Contributing to a defined benefit pension. These are very valuable pensions and the income you receive from them is normally worth far more than any tax charge that will apply.