Lifetime allowance – Tens maybe hundreds of thousands heading towards a pensions tax pothole

Have you thought of your lifetime allowance?

Many older workers with a final salary scheme could be heading towards a 55% tax cost without realising they are exceeding their limit on the pension lifetime allowance of £1m. The old limit was £1.25m.

If you go over certain limits on the annual and lifetime allowance, HMRC will claw-back the tax relief added to all your pension savings.

There are a large number people who have without realising lost valuable protections that allow them to save up to the old limit of £1.25m.

The state pension is excluded from the calcs, but all of your private pensions (defined contributions) will add towards your lifetime allowance.

Combined testing

As usual with some areas of pension, it’s complicated any many will not fully understand or drift towards a possible cost that might have been avoided or mitigated with the right information to hand. Nowadays, many people have multiple pots and mix of final salary and defined contribution schemes from past employment. Combining these and testing against HMRC limits is not simple to everyone.

Another risk point

There are two types of protection – called “individual” and “fixed” that you could/should check.

But you may be able to protect your pension(s) from these reductions. There are 3 protections you can apply for.

A: Protects your lifetime allowance to the lower of:

• the value of your pension(s) at 5 April 2016
• £1.25 million

B: Fixes your lifetime allowance at £1.25 million.

C: Protects your lifetime allowance to the lower of:

• the value of your pension(s) at 5 April 2014
• £1.5 million

All I’m doing is pointing out a possible risk point that if you feel (and you might very well be unaware) you are close to or might trigger, then double-check. Prevention on this is better than cure after the event.