The UK Pension Lifetime Allowance (LTA)

The pension Lifetime Allowance (“LTA”) is the maximum amount you can hold in UK pension funds before a taxation is applied to the excess.

The lifetime allowance taxation is deducted when a pension member triggers a Benefit Crystallisation Event (“BCE”). There are many types of BCE, including events such as where a member takes their pension benefits, reaches age 75, moves funds offshore, or dies. The full schedule of BCEs can be found in our LTA Guide.

The Life Time Allowance limit is currently £1,073,100 (2020/21)

This limit is due to increase each year with the Consumer Prices Index (CPI).  Once total UK pension funds exceed the LTA, they could be liable for high taxation, dependent on how funds are withdrawn.

Many pension members qualify for an uplift to the lifetime allowance, dependent on their circumstances and the pension contributions they have made over the years. There are still ways to protect your pension funds against the lifetime allowance.

You may already have HMRC protection, which could include:

  • Primary or Enhanced Protection with HMRC
  • Overseas/International Protection with HMRC
  • Fixed or Individual Protection with HMRC

Alternatively, you may already have crystalised your pension, if you have:

  • Taken your Pension Commencement Lump Sum (PCLS)
  • Started a scheme pension
  • Purchased a pension annuity
  • Withdrawn pension income
  • Already transferred funds to a Qualifying Recognised Overseas Pension Scheme (QROPS)

The rate of tax payable on pension savings above the lifetime allowance depends on how the money taken out.

The LTA tax rate is:

  • 55% if you extract funds at once, as a lump sum, with no further liability to income tax
  • 25% if you nominate the funds to the ‘income drawdown’ pot – thus making those funds further taxable to your marginal rate of income tax when you withdraw them.

It is important to understand planning options. If your pension funds are valued over £800,000, seek advice before being stung for unexpected tax. Read our Guide to the Lifetime Allowance, which is a highly technical 8-page FREE guide.

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