What is the pension lifetime allowance and is it changing?
WORKERS will want to make note of this huge change to pension rules - including the pension lifetime allowance.
The lifetime allowance for pensions saving is to be abolished, The Chancellor announced in the Spring Budget.
Jeremy Hunt is now allowing workers to put more money into their pension pot without being taxed in an effort to keep them in work longer.
The lifetime allowance currently stands at £1.07million, with savers incurring tax after that personal pension pot threshold has been exceeded.
The pension lifetime allowance was first applied in 2006, when it was set at £1.5million.
It rose to a peak of £1.8million by 2012 before gradually being cut.
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It was due to stay frozen at its current rate of £1.07million until 2026.
Here, we explain everything you need to know about the pension lifetime allowance, from what it is to how any changes will affect you.
What is the pension lifetime allowance?
The lifetime allowance is the total amount you can save in a pension scheme and not have to pay tax.
In other words, it’s the maximum amount you can save into all of your pensions combined without incurring a potentially hefty tax charge.
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This includes personal, workplace and defined benefit schemes, but excludes your state pension.
The lifetime allowance is one of two which set how much you can pay into your pension before getting penalised with tax.
The other is the annual allowance and caps the amount you can save in your private pension scheme in a tax year.
This is currently set at £40,000 per year, but this will rise to £60,000.
The tapered Annual Allowance rules will change so that even the highest earners can put in up to £10,000 rather than £4,000 at present.
Why was it frozen?
When the lifetime allowance was introduced back in 2006, it stood at £1.5million.
In 2010-11, it went up to £1.8million. Since then it has been cut and frozen.
It was set to be frozen until April 2026.
Freezing the pension lifetime allowance effectively lowered the amount you can put into your pension to avoid an extra tax on withdrawal.
What does it mean for retirement?
While a figure of over £1million may sound like a big sum, over a retirement of 30 years or more, it wouldn't have paid very generously.
The freezing of the lifetime allowance was not something that only wealthy people needed to worry about, as lots of ordinary savers would have felt the impact too.
Freezing the allowance harmed public sector workers such as doctors or senior teachers.
And, if the allowance had remained at the previous level, more and more people would have found themselves dragged into having to pay the tax as their salary increased.
Scrapping the allowance means that higher paid workers who might have felt forced into early retirement may now continue to work.
Former pensions minister and LCP partner Steve Webb said: "A series of measures in today’s Budget will enable large numbers of people to resume pension saving or boost the level of their pension saving."
Mr Webb added that abolishing the allowance will help those who had stopped saving in anticipation of breaching the LTA.
He added: "A series of measures in today’s Budget will enable large numbers of people to resume pension saving or boost the level of their pension saving, resulting in a ‘flood’ of money into pensions."
How much tax do I pay?
Check out the annual statements from your pension provider setting out what they expect will happen to your pension.
These can help you work out whether you are likely to exceed the allowance.
If you do go above the allowance, you’ll get a statement detailing how much tax you owe. The tax will be deducted before you start getting your pension.
The way the tax applies depends on how you receive the money from your pension.
What can I do if I'm approaching the limit?
If you are on your way to exceeding the lifetime limit, you need to think twice before moving more money to your pension.
As a pension saver, you are able to apply for protection that saves you from the tax.
But this means you have to stop putting any more money aside immediately. Find out more at .
Another option involves using tax-free savings such as ISAs (individual savings accounts) as well as pensions for retirement saving.
In some very specific cases, there may be an argument for breaching the limit, but as the calculations can be complicated, it’s worth seeking independent advice.
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The same applies if you are concerned in any way about the freezing of the pension lifetime allowance – and how it could impact you.
If in doubt, seek advice to avoid any costly mistakes.