Pensions are a great way to provide financial security for retirees. They can also be a good investment vehicle for younger workers who want to save for retirement.
Pensions are defined benefit plans where employers contribute a certain amount towards employees’ pensions every year. The government or other organizations then match these contributions. The employer pays out a fixed sum at retirement age.
You should always take the help of a lifetime allowance advisor before making any financial decision related to pensions.
However, these benefits are guided by set rules and regulations. Below we explain what a lifetime allowance pension is and who is eligible for such.
Meaning of a lifetime allowance
A lifetime allowance limits how much you can save on your pension. If you have an amount below the specified limit, you will enjoy government tax benefits. If you save more than the allowance, you will pay taxes on the excess amount.
The lifetime allowance in the United Kingdom is £1,073,100 as of the 2021/2022 tax year. This figure will be constant till the 2025/2026 tax year. This limit applies to all the total pension savings you have, including:
- Any defined benefits such as final salary, career average and so on
- Any savings in the form of pensions.
The limit does not take into account your State Pension.
When are you taxed on excess savings?
Checks are conducted at certain times to deduce if you have exceeded your lifetime allowance. These checks are carried out during the following periods:
- When you begin to draw your pension
- When you take any income or lump sum from any defined pension
- When you migrate to another country before age 75
- If you have attained 75 years and you have not touched your pension
- If you die before attaining 75 years and you have untouched retirement benefits
After 75 years, no other checks are conducted to ascertain whether your benefits are above the limit.
How do I pay tax if I go above the allowance?
After checks are done, you will get a detailed statement from your pension provider. You will find how much tax will be deducted if you are above the limit in the statement. Your provider will deduct the tax before you can even lay your hands on the pension.
You will need to report this deduction by filing a Self-Assessment Tax Return form. The Revenue agency will bill you or the person inheriting the benefits for the stated tax.
The rates are as follows:
- 55% – If your benefits are in the form of a lump sum
- 25% – For periodic payments or cash withdrawals
Working out if the allowance applies to you
You can deduce whether you will be affected by this limit by adding your benefits’ expected value at retirement age. Consider the benefits mentioned above, including last salary and so on.
For instance, if you are aged 55, you are likely to get your benefits at 60. It would be best to consider how much your pension value will have increased when you hit this age. If it does, then you should be prepared to pay taxes.
A lifetime allowance pension is a limit placed on how much you can save on your pension. It also helps you avoid saving extra amounts, which the government will tax you. However, it is worth noting that there is no limit for state pensions.