Lifetime Limit for Pension Savings

In addition to tax relief limits, see Tax relief limits for pension savings, and the annual retirement savings allowance, see Annual limit for pension savings, there is a limit to how much you are entitled to save for your retirement over your lifetime before you have to pay tax. This is called the lifetime allowance and for the tax year 2008/9 it is set at £1.65 million. If your total retirement savings exceed this amount when you come to retire, the money you receive from your savings will be subject to the lifetime allowance charge. This charge is essentially a tax rate which varies depending on the way in which you choose to draw your pension. If your total savings exceed the lifetime allowance and you decide to draw a pension, any money you receive from the excess savings (over the £1.65 million limit) will be subject to taxation at twenty-five percent. If your total savings exceed the lifetime allowance and you decide to withdraw money from the excess savings as a lump sum, the excess savings (over the £1.65 million limit) will be subject to taxation at fifty-five percent.

For example, you have a total pension fund of £ 1,700,000 when you come to retire in the tax year 2008/9. You can take the excess £500,000 over the lifetime allowance as a cash lump sum, and pay tax at fifty-five percent, leaving you with £225,000. Or, you can take the excess £500,000 as a pension, and pay tax at twenty-five percent, leaving you with £375,000. In all likelihood however, this pension will be liable to the higher rate of income tax, at forty percent, leaving you with £225,000. Essentially, when you are over the lifetime allowance the state will work to ensure that you pay a lot of taxes, because it believes that you would otherwise benefit unfairly from the pension saving tax advantages. If you are concerned about the effect that the lifetime allowance could have on your retirement savings, you should contact your pension scheme administrator or an independent financial advisor, for help in managing your savings.

For more information on the lifetime allowance, see Lifetime Allowance.