What you need to know about lifetime allowance


What is it?

Lifetime allowances for pensions was first introduced in 2006. This is the amount an individual is allowed to accrue in pensions scheme before paying any tax charges. The lifetime allowance for 2021/22 has been frozen and sits at £1,073,100.

Who pays the tax charge?

For pension funds that are above your lifetime allowance there are two different options in terms of paying the lifetime allowance charge, either:

  1. Take as a lump sum and pay 55% tax charge
  2. Keep within the pension fund pay 25% tax charge on funds

You can either instruct the pension provider to make the lifetime allowance tax charge for you or you can pay the tax charge yourself rather than coming out of the pension fund.

When is the lifetime allowance charge applied?

Each time an event happens within the pension fund a lifetime allowance test is applied. The three main events are

1. Drawing funds from your pension or putting annuities or defined benefit pensions into payment. You don’t have to put the whole fund into payment at any one time.
2. Death, before 75
3. Age 75 – the overall value of your pension funds will be measured against the lifetime allowance – this is the one you can’t avoid.

What are the key planning considerations?

  • Not all pensions are created equally, defined benefit pensions have a more favourable treatment in relation to defined contribution pensions due to the way they are measured.
  • What Lifetime allowance protections are already in place and checking they have not been busted. Some people might still be in a position to apply for fixed and individual protections 2016. Fixed protection 2016 allows you to keep your lifetime allowance at £1.25million on the condition you haven’t made or will make future contributions
  • Other assets and/or inheritance tax position
  • How you are going to structure your income
  • Financial position of your beneficiaries

Lifetime allowance can be extremely complex area to navigate. This podcast is not intended as advice and those who face any of the issues discussed in the podcast are encouraged to seek appropriate financial planning advice.


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This episode was recorded on 19/04/2021

This S&W The Pulse podcast is of a general nature and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of what is said. The views expressed are not necessarily those of the presenter or of Smith & Williamson or any of its affiliates. No reproduction of this podcast may be made in whole or in part for professional or recreational purposes. No action should be taken based on this podcast and we accept no liability if we change your views on any of the subjects mentioned.

Important information
Please remember the value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.

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Podcast information:

The Pulse from Smith & Williamson

Financial Planning Show: What you need to know about lifetime allowances

Episode 6

Broadcast on Smith & Williamson at 09:00, 27th of APRIL 2021

Available online from 10:00 on the same day .

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