So, you’ve heard about the lifetime allowance? In simple terms it relates to the maximum amount you can contribute to your pension during your lifetime.
For many people, the lifetime allowance is not going to be a problem. However, if you are in one of the many higher paid professions, in our view this is something which should definitely be on your radar.
Here are the relevant facts:
- The lifetime allowance is currently £1,073,1001
- The lifetime allowance has been frozen until 2025/20262
So why should you be bothered?
£1,073,100 may sound like an astronomical amount of money. However, if you are even halfway to that figure and are in your 40s you may well have some considerable issues on the horizon.
Let’s look at an example:
Mr A is 40 years of age with a current pension pot valued at £190,000.
At what point is he going to breach the limit on pension contributions?
Well, let’s say that his pension is growing at a net rate of 5% per annum and he is making the maximum contribution of £40,000 per annum. Assuming he retires at age 68 he will have a pension fund valued in the region of £3.4m.
But more importantly, starting with this a pension valued at just £190,000 and making contributions at £40,000 per annum, means that he will breach the current lifetime allowance before he’s 52.
Am I being overly pessimistic? Maybe. The lifetime allowance could always increase.
Possibly, but if you look at things historically3 you will see that quite the opposite is happening.
Standard lifetime allowance
| Tax year | Amount |
| 2021 to 2022 | £1,073,100 |
| 2020 to 2021 | £1,073,100 |
| 2019 to 2020 | £1,055,000 |
| 2018 to 2019 | £1,030,000 |
| 2017 to 2018 | £1,000,000 |
| 2016 to 2017 | £1,000,000 |
| 2015 to 2016 | £1,250,000 |
| 2014 to 2015 | £1,250,000 |
| 2013 to 2014 | £1,500,000 |
| 2012 to 2013 | £1,500,000 |
| 2011 to 2012 | £1,800,000 |
So, what can you do?
Whilst this may look like a helpless situation, there are in fact various ways in which the problem can be tackled. Of course, specific solutions are tailored to individuals and there is no one size fits all. However, with the right planning one could consider options such as
- funding a partner’s pension
- making contributions into other (non-pension) investments
- retiring early
- or a number of other potential approaches.
If you don’t think this will be a problem, bear in mind that when this freeze in the LTA was announced, it was disclosed that the treasury expected this policy to raise £990m by 2025/26!
To see if this may affect you, speak to an independent financial adviser sooner rather than later.
References
1 – https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance
2- https://www.ft.com/content/61351466-a918-476c-a095-8450b2850a1e
Further information can be found on https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/lifetime-allowance-for-pension-savings
This blog is for general information only and does not constitute advice.