What is the Lifetime Allowance Percentage?

What is the Lifetime Allowance Percentage?

The lifetime allowance percentage is the percentage of your pension that has been crystallised and tested against the LTA.

For example, if you had a £1,055,000 pension and chose to crystallise £527,000 you would have used 50% of your lifetime allowance (based on the 19/20 standard lifetime allowance).

This would leave 50% left to use in the future. This mechanism is quite interesting as the pension lifetime allowance is set to increase by CPI each year. So in the future, the lifetime allowance will be higher than the current £1,055,000 (19/20). If the lifetime allowance increased to £1.2 million in the future for example, you would have 50% of this higher amount to use, 50% x £1.2 million = £600,000.

In an environment where the lifetime allowance is increasing, a percentage-based lifetime allowance is a good thing. Should limits start to be reduced again in the future, the system would have the opposite effect.

How to avoid the pension lifetime allowance

Pre-planning before you breach the lifetime allowance limit could result in avoiding paying any lifetime allowance tax in the future. In this case income tax may still be paid, but this would be at a lower rate of 20%, 40% or 45%, rather than the lifetime allowance rate of 55%.

If your pension fund has already exceeded the lifetime allowance, managing the crystallisation process carefully can limit the amount you will need to pay.

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