Risk of exceeding pension lifetime allowance

1 June 2015

Are you at risk of exceeding the lifetime allowance for pensions?
 Everyone with a pension in the UK is subject to something known as the Lifetime Allowance. This is the maximum amount of money you can accumulate in your pension pot without triggering an extra tax charge. The current LTA (Lifetime Allowance) is £1.25m, but from April 2016, this will be reduced to £1m.

Why the change?

The reduction was announced by Chancellor George Osbourne in his recent 2015 budget and was done so because the £1.25m lifetime allowance was 'unsustainable' according to the Chancellor, and by reducing it will not affect 96% of the population, only the 4% of very top earners being affected.

I'll never be able to save £1m into my pension pot, so it won't affect me will it?

You'll be surprised. Younger people especially have the potential to be affected by the reduction in the Lifetime Allowance. Take for example, a 21 year old earning the minimum wage. If that person works fulltime and puts 20% of their earnings away every month, they could easily have reached this limit. This could be somewhat offset by the fact that George Osbourne has now linked the LTA to inflation, but consider that the young person could be earning substantially more than the minimum wage as they get older and you can see that it will affect more and more people as time goes on. In fact, it could very well affect more and more people who are now in the middle of their working lives.

If I think I may be affected, what can I do?

The first thing to do is take advice from a pension or financial advisor, who can make the necessary calculations to check whether you are likely to be affected by the reduction in the Lifetime Allowance. There are various options but they will depend upon the exact amount of your pension pot, the scheme you are in, your age, lifestyle expectations and numerous other factors to decide the best course of action. It's because of this complexity that professional advice is a must to ensure you make the right decision for you and your circumstances.

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