A limit on the amount of tax relief you’re allowed
You can save as much as you like into a pension, but there is a limit on the amount of tax relief you’re allowed. From 6 April 2014, the Lifetime Allowance for pensions reduced from £1.5m to £1.25m. In essence, the Lifetime Allowance is intended to cap the level of tax advantaged pension funds that an individual can accumulate within their lifetime.
When the Lifetime Allowance reduced to £1.25m, two new forms of protection were introduced:
Fixed protection 2014 and Individual protection 2014.
Anyone who has pension benefits with a value in excess of the Lifetime Allowance will be subject to a tax charge on their excess benefits value known as the ‘lifetime allowance charge’.
The Lifetime Allowance creates a ceiling on the benefits value that can be built up by your registered pension scheme whilst continuing to benefit from tax relief. If the benefits value when they are taken exceeds the Lifetime Allowance, the difference between the two is subject to the Lifetime Allowance charge.
The Lifetime Allowance charge can be applied in either one of two ways or a combination of both, depending on how the excess benefits value above the Lifetime Allowance is taken. The charge is either 55% if taken as a lump sum, or 25% if taken as income.
If you decide to take your benefits in stages (more commonly referred to as ‘phased retirement’), you’ll use up a proportion of the Lifetime Allowance in force each time benefits are taken.
If you take any of your benefits, this is known as a ‘benefit crystallisation event’. Anyone taking their benefits either in full or in stages will have one or more benefit crystallisation events.