What Is Your Lifetime Allowance?
Your lifetime allowance is the amount of money you can have in your pension fund without triggering an extra tax charge when you withdraw it. The current value is £1.25m but the lifetime allowance is going to change in April 2016.
Changes to Lifetime Allowance
At the end of this fiscal year (2015/16), the lifetime allowance will be lowered by £250,000 to £1m. This means that any amount of money you withdraw from your pension over the new limit of £1m after 6th April 2016 will be liable for additional taxation. Just how much additional tax is determined by how you take the money.
If you take the savings as a lump sum – something savers are now able to do due to the new pension freedoms – you will be taxed at 55%. That is 55% on top of the tax you are already paying on the first £1m.
For example, if you have a pension pot of £2m and you withdraw the whole of your savings in one lump sum, for the first £1m, you will receive 25% tax free and the balance will be taxed as income at your highest marginal rate. The additional £1m will be taxed at 55%.
If you choose to take the additional £1m as income you will be taxed at 25% plus your usual rate of income tax on the amount you receive.
Analysis of Changes to Lifetime Allowances
Pension savings are currently taxed upon being withdrawn as opposed to upon being deposited. This means that any changes to how pensions are taxed are often highly controversial.
Why? Because people who began saving decades ago will have planned according to the system as it was at the time. Our tax-on-withdrawal system means that savers are forced to act with a degree of ‘good faith’: faith that the government of the day will not change their pension plans too dramatically by the time they decide to retire.
Doing so could punish diligent savers who attempted to be responsible, something perceived as unjust. But with the lifetime allowance being reduced by £500,000 since 2006 there is a worry that some savers’ plans may be being affected by government policy.
Defenders of the changes would argue that ten years of savings (since 2006) is not a very long time in the world of pensions, meaning that the changes won’t have too much of an adverse effect. Further, the reduction has been staggered with advanced warning to give savers time to change their plans should they wish.
There has also been some speculation in the media about just how many people will actually be affected by April’s changes to lifetime allowance. The Telegraph’s Nicole Blackmore suggested that 460,000 people could be affected.
As legislation around UK pensions continues to change at an historic pace, it is more important than ever to seek sound advice before retirement.
Our Hertfordshire financial advisers are highly trained and experienced, offering advice you can trust with a personalised, friendly service. So rather than deal with this minefield yourself, discuss your retirement plans with an expert today. Email firstname.lastname@example.org or call us on 01992 500 261 now.