Maximum total amount that an individual can hold within all their pension funds
There’s also a maximum total amount that an individual can hold within all their pension funds without having to pay extra tax when you withdraw money from them. The lifetime allowance is a limit to the amount you can save in your Self-Invested Personal Pension or other pensions over your lifetime, but excludes your State Pension.
The allowance is currently £1 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.
Every time a payout from your pension schemes starts, its value is compared against your remaining lifetime allowance to see if there is additional tax to pay.
If the cumulative value of the payouts from your pension pots (including the value of the payouts from any defined benefit schemes) exceeds the lifetime allowance, there will be tax on the excess – called the ‘lifetime allowance charge’.
The way the charge applies depends on whether you receive the money from your pension as a lump sum or as part of regular retirement income. Any amount over your lifetime allowance that you take as a lump sum is taxed at 55%.
There were and are schemes that allow you to protect your lifetime allowance. If your total pension savings exceeded £1 million on 5 April 2016, there are still two schemes you can apply for – Individual Protection 2016 and Fixed Protection 2016.
From 6 April 2018, the Government intends to index the standard lifetime allowance annually in line with the Consumer Prices Index (CPI).