Understanding the lifetime allowance on pension contributions 



Many people in the UK make contributions during their working life into a private pension scheme. Some of these schemes may be tax-free, but only to a certain point. This tax-free allowance applies to many different schemes, such as overseas pensions, stakeholder pensions and workplace pensions, yet different limits on contributions apply to each of these.

During each tax year, this currently stands at either £40,000 or 100 percent of earnings, whichever is lower. There is also a lifetime limit on tax-free contributions however, which currently stands at £1,055,000.

This means that should a person pension exceed this threshold, tax may be applicable. Inquiries can be made with one’s pension provider to see how much of the lifetime allowance has been used at any time.

It is not uncommon for a person to belong to more than one pension scheme. Anyone belonging to more than one must add up how much of the lifetime allowance they’ve used in all schemes they subscribe to.

Each type of pension pot may count differently towards an individual’s allowance, depending on if it is a defined benefit or defined contribution scheme.

When it comes to a defined contribution scheme, Gov.uk states the following applies to the lifetime allowance: “Money in pension pots that goes towards paying you, however you decide to take the money.”

However, Gov.uk states that for a defined benefit scheme “usually 20 times the pension you get in the first year plus your lump sum” counts towards the lifetime allowance.

Any queries can always be resolved with your provider.

A withdrawal on one’s pension pot is also a possibility outside of the lifetime allowance. This withdrawal, up to 25% of the pot, is also tax-free.

The Money Advice Service explains: “The remaining pot is used to provide an income or can also be withdrawn; in both cases this is taxable,” it states.

“That means any money you receive over your Personal Allowance will be taxed.”

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