Lifetime Allowance Common Questions and Answers

Lifetime Allowance Common Questons and Answers

The government understands that it would not be fair to backdate the new LTA to savers who already have pension values in excess of the new proposed limit and therefore will offer savers two types of protection that will be available to people when the new LTA comes into force. 

There are two options to choose from when it comes to the pension lifetime allowance.

  1. You can withdraw the funds that exceed the lifetime allowance and pay a one-off 55% tax charge for the privilege. I would like to add that this should be the last option for clients. Planned diligently, this should never need to happen.
  2. You can leave the funds invested in the pension and opt to pay the reduced 25% tax. This will crystallise the funds left in the pension and mean that they can be used to draw income down from in the future. You need to be aware that income tax will apply to these withdrawals, so higher and additional rate tax-payers may find this a more expensive option than paying the 55%.

As with all financial planning, each case and set of circumstances is very different. However, if your pension looks like it may exceed the LTA in the future, some early planning can mean neither of the above taxes will apply.

For some creative ideas on how to manage your lifetime allowance challenges, get in touch with a member of our lifetime allowance team.

An enhanced lifetime allowance allows UK citizens who have built up a pension overseas to add them to their standard UK pension lifetime allowance and enhance the value back in the UK. There are some conditions. If tax relief was claimed here in the UK on the contribution, even though you were employed overseas at the time, these contributions will not count towards the enhanced value.

Contributions made to the pension while employed overseas, where income tax relief has not been claimed, may qualify for the overseas enhancement factor.

As with most parts of pension legislation what can and cannot be claimed is complex. If you are wondering if you could apply for an overseas enhancement factor, get in touch with a member of our pensions team.

If your pension pot exceeds the lifetime allowance it may eventually be taxed at either 55% or 25%, subject to how you choose to manage the pension. It is important to note that a lifetime allowance test only occurs when a benefit crystallisation event occurs. If the funds that exceed the lifetime allowance are not crystallised, they will not be tested against the lifetime allowance until you reach age 75.

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