Lifetime Allowance (LTA)
Pension Lifetime Allowance
The Lifetime Allowance (LTA) is a cash threshold that can be drawn from a pension scheme without the danger of getting an extra tax charge. The drawn amount can be in retirement income or lump sums.
The LTA for the 2020/2021 tax year is £1,073,100 and will likely increase to grow in line with the current inflation rate. That means you can draw as much as £1,073,100 and not pay any allowance charge when you are already retired.
Other than the State Pension allowance, LTA applies to all other work and personal pensions, including defined contribution and defined benefit pensions. If you withdraw more money than your lifetime allowance, then you pay extra tax on top of the income tax you will need to pay as well.
Even though most people don’t need to worry about lifetime allowance, immediate action is necessary if the value of your pension benefits is near or a bit north of your lifetime allowance.
Although your pension pot and contributions might appear like modest amounts now, by the time you want to withdraw your benefits, they can easily pass the LTA threshold. Therefore, you might need to stop making contributions to your pension scheme now or take your pension early regardless of whether you have retired to ensure your benefits don’t surpass the LTA. The test for the lifetime allowance is done each time you access a pension benefit.
How to calculate lifetime allowance
Once you start making withdrawals from your pension, the value will be taken from your LTA. That should also be visible on your statements. Even though the LTA doesn’t affect everyone, it is recommended you take notes of your withdrawals and calculate how it all stacks up against your pension scheme. That’s especially important if you have built up a considerable pension pot.
Defined Contribution Pension LTA
The defined contribution pension‘s value is determined by the invested amount in it, as well as how your investments performed over the time period before retiring. Each time you withdraw money from your pension pot, you will need to check your defined contribution pension. That’s because the value of your defined contribution pension will always be checked against the value of your LTA.
Defined Benefit Pension LTA
On the other hand, if you have a final salary or a defined benefit pension, the value is calculated based on your salary and how long you spent working for your employer. To calculate the total value of your defined benefit pension, you need to multiply the expected yearly pension by twenty. If you plan to take a tax-free lump sum, you need to take that into account as well.
Lifetime allowance charges
How much extra tax you will need to pay if you exceed your LTA depends on how you got paid. If you opt for a lump sum, you will be charged 55% tax. If you decide on annuity or a drawdown, you will need to pay an extra 25% on top of your income tax.
Increases to the lifetime allowance
The lifetime allowance increases along with the inflation rate for the current year. The LTA allowance had its peaks and falls in the last ten years. At its peak, it was £1,800,000, whereas at its lowest point it was at £1,000,000. The discrepancies every year might seem insignificant. However, even the smallest yearly discrepancies can make all the difference to savers with big pots and be the cause for meaningful tax savings.
Standard lifetime allowance for every year from 2006/07:
- 2006-07 £1,500,000
- 2007-08 £1,600,000
- 2008-09 £1,650,000
- 2009-10 £1,750,000
- 2010-11 £1,800,000
- 2011-12 £1,800,000
- 2012-13 £1,500,000
- 2013-14 £1,500,000
- 2014-15 £1,250,000
- 2015-16 £1,250,000
- 2016-17 £1,000,000
- 2017-18 £1,000,000
- 2018-19 £1,030,000
- 2019-20 £1,055,000
- 2020-21 £1,073,100
Those that have accumulated high-value benefits are eligible to ask for “protection” against tax charges. That includes four primary options:
- Individual protection
- Fixed protection
- Enhanced protection
- Primary protection
The lifetime allowance and protection
LTA first came to be in 2006, and it was significantly reduced in the following years. The subsequent pension reforms also enabled those with benefits that exceeded their LTA in applying for “protection”. That way, that group was able to protect the accumulated benefits from tax charges. Those interested in checking whether they can count on this protection need to head to the HM Revenue and Customers online service.
Primary protection
Enhanced protection
Fixed protection
Individual protection
Do you still have any questions related to lifetime allowance and how to protect yourself from it?
UK Pension Help can connect you to a qualified, regulated financial adviser who can answer any questions you might have around lifetime allowance.
Book your free, no obligation consultation today so they can further assist you.