What is the pension lifetime allowance and what changes were made in Budget 2017?

Lifetime AllowanceThe Budget 2017 did not cut the pension lifetime allowance as feared. But what is the pension lifetime allowance?

The pension lifetime allowance (LTA) is the overall amount of pension savings that you can have at retirement without incurring tax charges.

The Pensions Advisory Service says: “The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.”

The lifetime allowance has stood at £1million since April 2016 when it was reduced from £1.25million. It is now scheduled to rise by £30,000 in April 2018.

The Budget said: “The lifetime allowance for pension savings will increase in line with CPI, rising to £1,030,000 for 2018-19.”

An increase in Consumer price index (CPI) is linked to the base rate or the LTA. So an increase in the CPI will lead to a hike in the LTA limit.

Ahead of the Budget, Investec warned that the Chancellor could reduce the lifetime pension allowance “so more pension benefits incur an extra tax charge”.

But this did not happen and there was very little on pensions in the Budget speech given in the House of Commons earlier today.

Mark Henderson, senior partner at online investment site True Potential Investor, said: “It’s hard to remember a Budget for over decade where pensions got fewer mentions…

“That is a relief to pension savers who have lost count of the number of changes to pensions over recent years.

“Slashing annual allowances must have been tempting against lower growth figures and pressure to spend on infrastructure, but we are pleased that the Budget offers a period of calm and stability for pensions.”

Mr Hammond did not reduce the pension annual allowance, which currently stands at £40,000. If your ‘adjusted income’ is more than £150,000, your annual allowance is tapered down.

The Pensions Advisory Service says: “While most people aren’t affected by the lifetime allowance, you should take action if the value of your pension benefits is approaching, or above, the lifetime allowance.

“As pensions are normally a long term commitment, what might  appear modest today could exceed the lifetime allowance by the time you want to take your benefits.

“It may be necessary to take your pension early or stop contributing to the scheme/plan, even though you have not retired, to avoid your benefits exceeding the lifetime allowance.