Lifetime allowance 2021/22
The pensions Lifetime Allowance (LTA) caps the upper level at which tax-free cash can be withdrawn from your pension savings at the rate of 25% and the LTA is also used at age 75 to make a tax charge for the excess amount over the LTA if you have an excess. This is an area where forward planning with a financial adviser or financial planner can help with managing the amount of tax that might need to be paid due to a lifetime allowance charge when this important birthday arrives.
The LTA applies to all your pensions savings in aggregate even if they are in many different pension policies or schemes. Special rules apply to Final Salary Pension Schemes such that the value for LTA purposes is 20 times the annual pension entitlement. As an example, if you expect to get a pension of £50,000 per year your value for LTA purposes is £1,000,000 which is currently below the LTA, but you will need to add in all other defined contribution pension pots to arrive at the total value of your pension retirement savings.
The standard Lifetime Allowance for the current tax year (2021-2022) is £1,073,100 and it applies to the total amount (value) of your pension benefits across all your pension pots. It did not increase as expected in this year’s budget as it was expected to do from last year’s level in line with the consumer price index, but now it is set to remain at this year’s level for the next few years, but we will see whether this position changes.
It wasn’t that long ago that the LTA level was £1.8m. Then it started coming down, then back up again, now ‘frozen’. The subject of pensions tax relief is always the subject of much discussion amongst the pensions industry because HM Revenue ‘give away’ tens of £ billion each year in tax relief and they need to try to balance everybody’s needs. There is a perennial expectation that the higher rate of tax relief will be taken away from pension tax relief, but it hasn’t happened yet.
It is still possible to have a higher protected LTA than the standard one, but the bar is quite high as your pension savings would need to have been valued at £1,250,000 before the end of 2015-2016 tax-year and you must have ceased all private pension contributions by April 2016. If you think this is a possibility for you, speak to a financial adviser so they can check this for you as it is potentially worth an extra £44,225 in tax-free cash allowance.
The state pension does not count towards the LTA and continues to be paid out regardless of a person’s wealth. The entitlement to state pensions is based purely on National Insurance (NI) credits gained during your working years. Credits start to be earned at age 16 and end at your state pension age. NI Credits are given to those receiving Child Benefit so there is no need for them to pay voluntary NI contributions during their child-rearing years.
Worrying about the LTA is probably a good problem to have and dealing with it tax-efficiently can be quite a complex challenge especially, when considering estate planning and wealth transfer. As ever, a good financial planner will be able to discuss your options with you so you can be well informed how to handle this.