Lifetime allowance for pensions increases to £1.05m

The standard lifetime allowance for pensions has increased by £25,000 in line with CPI inflation to £1,055,000 for the new tax year from 6 April

The 2.4% rise, based on September 2018 CPI, brings the lifetime allowance to £1,055,000, up from £1,030,000 from 6 April 2019 for the 2019/20 tax year and is the lifetime limit for pension savings liable to standard tax rates before a higher tax charge is made.

Any pension pot, whether lump sums or retirement income, which exceeds the annual limit, is subject to an additional tax charge. This affects funds held in defined contribution and defined benefit pension schemes. All pension schemes are treated as one pot for the purposes of the allowance.

‘Funds withdrawn in excess of this, when you start to draw your cash or pension, or have excess funds on death before age 75, or on reaching 75, create additional tax charges on the excess. There is lifetime allowance protection you may be eligible for to reduce the impact of this tax,’ said Kay Ingram, director of public policy at LEBC.

The rate of tax on pension savings above the lifetime allowance is 55% if it is taken as a lump sum; or 25% if it is paid in any other way, for example through pension payments or cash withdrawals.

Significant changes to pensions were made during the 2010-15 coalition government under Chancellor George Osborne including the introduction of pension freedoms to drawdown funds without an annuity, slashing the value of the lifetime allowance, which was set at £1.8m in 2011.

The allowance has been gradually cut over the last decade until it reached the £1m mark in tax year 2016/17. In Budget 2015, the Chancellor agreed to increase the allowance annually in line with CPI (consumer prices index) from tax year 2018 to 2019 onwards.

Protection options

It is possible to protect a lifetime allowance by arranging fixed protection or individual protection for payments made before 6 April 2016.

Under individual protection, for example, pension holders can continue to invest in a pension and protect the value of pension savings at the £1.25m allowance. However, tax must be paid on money taken out of pension savings that exceed that protected lifetime allowance. Fixed protection rules do not allow ongoing pension contributions except in very limited circumstances, which effectively remove the benefit of having any protection in place.

To apply for individual protection, individuals need to use (or apply for) their Government Gateway user ID and password, and have details of total pension savings value at 5 April 2016 and a breakdown of the amounts. This information can be provided by each pension scheme administrator.

As a tax measure, the cut in the lifetime allowance has saved an estimated £550m a year in tax relief for the highest earners, with an estimated further saving of £590m for the Exchequer in 2019/20.

Accountancy Daily