Pension savers face Lifetime Allowance cut
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From 5 April 2016, your tax-free pensions savings limit will be cut from £1.25m to £1m. This cap is called the ‘lifetime allowance’ and applies to your entire pension savings (apart from the state pension).
When the lifetime allowance was first introduced in 2006, it only affected high earners in the UK who could afford to grow seven-figure pension pots. But as the limit has reduced in recent years, many more thousands of people have been affected – especially those in final-salary schemes who have built their entitlement through many years’ work.
If your pension savings are worth more than the £1m lifetime allowance when you take your benefits, you’ll have to pay the lifetime allowance tax charge on the excess. The tax charge is 55% if you take the excess pension pot as a lump sum, or 25% if you take the pension as a regular payment.
The amount you can pay into your pension every year (the annual allowance) is currently £40,000 . You usually pay tax if savings in your pension pot exceed the annual allowance, but you can top up your allowance for the current tax year (6 April to 5 April) with any allowance you didn’t use from the previous three tax years.
Pensions savings allowances
|Tax Year||Lifetime Allowance||Annual Allowance|
Protecting your money
If you had a pension pot of more than £1.25m as at 5 April 2014 you may be able to claim Individual Protection 2014. This will provide a protected lifetime allowance equal to the value of your pension rights on 5 April 2014 (up to an overall maximum of £1.5m).
You will not lose Individual Protection 2014 by making further savings into your pension scheme, but any pension savings in excess of your protected lifetime allowance will be subject to the lifetime allowance charge.
Applying for Individual Protection 2014
You became eligible to apply for Individual Protection 2014 from 18 August 2014. Applications are still open but must be received by HMRC no later than 5 April 2017. We expect to see similar transitional protection regimes announced ahead of the lifetime allowance cut.