Watch out for pensions Lifetime Allowance tax charges

Watch out for pensions Lifetime Allowance tax charges.

Gettyimages 697853664 WEB
Gary Smith
Published: 21 Aug 2015 Updated: 13 Jun 2022

As the old saying goes; there are only two certainties in life, these being death and taxes. Whilst our financial planners can’t make clients immortal they can most certainly assist in ensuring that their pensions and investments are structured to avoid having to pay unnecessary taxes during their lifetime. Indeed, I am yet to meet anyone who voluntarily chooses to pay more tax than they are required to, but many individuals do inadvertently end up falling into this category.

One such area of where we can potentially help clients avoid incurring unnecessary taxes is in relation to the Lifetime Allowance for pension funding and the tax charges that might be incurred if the value of an individual’s pension benefits exceeds this allowance.

The Lifetime Allowance was first introduced from 6 April 2006 as part of the then, new pension simplification legislation. It effectively represents the total benefits that an individual can accrue within registered pension schemes during their lifetime, without any tax charges being levied. If an individual’s pension benefits exceed their available lifetime allowance, then the excess will be subject to tax charges at a very punitive rate of 55%.

At its peak the lifetime allowance was £1.8 million. However, due to the Government’s attempt to reduce the Budget deficit via its austerity programme, the lifetime allowance has been subject to a period of significant reductions, culminating in confirmation by the Chancellor that it will be reduced further from its current limit of £1.25 million to £1 million from 6 April 2016.

With this in mind, it was interesting to recently read that HM Revenue & Customs, having received a freedom of information request from a pensions provider, has confirmed the amount of tax revenue it has received from the lifetime allowance tax charge during the previous 6-year period, and this is confirmed in the following table:


Tax Revenue Received


£24.9 million


£31.4 million


£46.9 million


£52.9 million


£98 million


£94 million

Source: Citywire

What is clear from this data is that the tax revenue received has steadily increased and, whilst there was a small decrease during the 2014/15 tax-year, this may just prove a temporary blip, with the tax revenue set to continue to increase, especially once the lifetime allowance is reduced to £1 million from 6 April 2016.

Whilst many might not think that they will ever be affected by this tax charge, those who currently have a pension fund of £500,000 would exceed the £1 million limit within the next 10-year period should they achieve an annual investment return of 7.5% and if no further contributions are made.* Furthermore, those who are lucky enough to still be members of defined benefit pensions schemes would exceed the £1 million lifetime allowance if they are due to receive an initial pension that exceeds £43,500 and a lump sum equivalent to 3 times the pension at retirement.

It is possible to avoid and/or reduce any future lifetime allowance tax charge by proactively managing your pension arrangements prior to retirement and during the decumulation phase of retirement. In some instances a tax charge can’t be avoided, but it is important to provide an understanding of what impact the tax charge would have on retirement benefits. Our financial planning team are experts in this area and have knowledge and experience that could potentially benefit you.

Unfortunately the lifetime allowance is not the only potential tax charge that your pension provision could be subject to, and the Government have already opened a consultation period to discuss the future of pension tax relief. Whilst the outcome of this consultation is not yet known, we do know that, with effect from 6 April 2016, the amount of tax relieved pension contributions that can be made on behalf of an individual will be gradually reduced from £40,000 for those who receive total earnings in excess of £150,000 down to just £10,000 per year for those earning £210,000 upwards.

This change, coupled with the potential removal of tax relief in the future, means that making use of the annual pension contribution allowance and carry forward allowances currently available has never been more important. Under existing rules pensions remain one of the most, if not the most, tax-efficient method of saving towards retirement.

If you believe you might be impacted by the reduction in the lifetime allowance or changes to pension reliefs for higher earners and would like find out more about how we might be able to help you, contact us on 020 3131 5963 or book an appointment with one of our financial planners.

*Figure used for illustrative purposes only.


This article was previously published on Tilney prior to the launch of Evelyn Partners.