Lifetime Allowance For Pension Savings

Llifetime Allowance For Pension Savings

The Lifetime Allowance refers to the set limit an individual can draw out as pension benefit from the existing pension schemes. This draw out can either be a lump sum amount or retirement income. It can be drawn out without any tax obligation. Thus, it’s the maximum value of benefits that can be drawn out from a pension scheme without it being subjected to taxation and the lifetime allowance charges.

The Lifetime Allowance traces its roots back in 2006. The value of the lifetime allowance at the time was 1.5 million Pounds. Ever since, it has increased continually year by year up to an all-time high of 1.8 million Pounds as at 2010. Currently, its value is at 1 million Pounds in the 2016/2017 tax year; having dropped significantly due to continual push for pension reforms.

Lifetime allowance - pension benefits

Photo Credit: jspensions.co.uk

On a general scale, most people are not affected by the lifetime allowance. However, you should act swiftly if you find out that the overall value of your pension benefit has exceeded or is approaching the lifetime allowance. The course of action could entail taking your pension early or ceasing your contributions to the pension scheme. This would forestall the possibility of your pension benefits to exceed the lifetime allowance.

You can protect your lifetime allowance through various provisions such as the Individual Protection and Fixed Protection schemes of 2016. These provisions can be applied by those whose cumulative pension savings exceeded 1 million Pounds on April 5, 2016. For those whose cumulative pension savings exceeded 1.25 million Pounds on April 5, 2014, before the reduction, you can apply for protection too through the Individual Protection and Fixed Protection schemes of 2014. However, you have a time limit of up to April 5, 2017, for your submissions to Her Majesty’s Revenue and Customs (HMRC). The rules governing protection are complicated. It’s advisable that you seek professional help from your pension administrator or a financial adviser. This is recommended specifically when you’re contemplating applying for protection, and when you’re deciding on the time and manner of taking benefits from your pension scheme.

All applications for protection are done through the Her Majesty’s Revenue and Customs (HMRC). If you’re thinking of applying for Individual Protection 2016, you can do so as from April 6, 2016. Applications can now be made online as from July 2016 – after the formal launch of the online system.

The lifetime allowance charge is applicable to those whose benefits have exceeded the lifetime allowance at the time the benefits are being taken. They apply in the following two ways or combination of both depending on how you take the exceeded benefits.

  • 25% on income taken
  • 55% on lump sum amounts

Any amount that you take as retirement income or any other form of income will attract a lifetime allowance charge of 25%.

Any amount that you’ll take as a lump sum will be charged at 55%.

All these charges should be deducted by your pension adviser or administrator and paid to the HMRC.

Take note of the value of your pension benefits so as not to exceed the lifetime allowance.

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