Lifetime Allowance

Everyone who contributes to a pension savings scheme is subject to a lifetime saving allowance. This lifetime allowance indicates the amount of money that you are allowed to save before retirement for your pension without it being subject to tax. For the tax year 2007/2008, this lifetime allowance is set at £1.6 million per person. This means that you are allowed to save up to £1.6 million in your pension savings scheme until your retirement. This lifetime allowance is your total allowance: this means that the total amount of money that you save in your pension schemes, including your tax relief and any extra bonuses you receive from your scheme provider, cannot exceed this amount if you wish to avoid charges.

If when you come to retire your pension savings total more than £1.6 million, the excess is subject to the lifetime allowance charge. If you choose to withdraw your pension savings as a pension, the excess is subject to a twenty-five percent charge. If you choose to withdraw your pension savings as a lump sum, the excess is subject to a fifty-five percent charge. If for example when you come to retire your total pension savings total £1,800,000, this is £200,000 above the £1.6 million lifetime allowance. If you choose to withdraw your savings as a lump sum, this £200,000 excess will be subject to the fifty-five percent lifetime allowance charge. You would be charged £110,000, reducing your total pension savings to £1,690,000. If on the other hand you chose to withdraw your savings as a pension, the £200,000 excess would be subject to the lesser lifetime allowance charge of twenty-five percent. You would be charged £50,000, reducing your total pension savings to £1,750,000. The lifetime allowance is purposely a high amount so that a relatively small percentage of savers should be affected by the charges. The lifetime allowance is set to increase each year as follows:

Hereafter the lifetime allowance amount will be reviewed every five years.