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MLP Wealth

Planning for your future

 
My pension is over the lifetime allowance

Ask an expert: We look at how HMRC will tax pension income that is over the £1.25m lifetime allowance.

If my pension is worth more than the lifetime allowance and I pay the 55pc tax charge on the excess, is the remaining money over the limit subject to income tax?

The lifetime allowance is the maximum amount that you are able to build up in your pensions before a punitive tax charge is incurred. The limit started at £1.5m in 2006, rose to £1.8m in 2010 and has since been reduced. The LTA is £1.25m for the 2015/16 tax year and is due to drop to £1m from 2016/17.

In essence if you take money above the LTA as a lump sum you pay just the 55pc tax charge and no additional tax. If you take it steadily, as income, you pay a 25pc tax charge and then you also pay your usual rate of income tax.

Jason Witcombe, of Evolve Financial Planning, said you are tested against the lifetime allowance at various points. The most common is when you first draw pension benefits from a scheme.

“Taking a simple example, if you retire with a pension fund of £1.5m and draw it all in one go, you will exceed your lifetime allowance by £250,000,” he said. “This excess suffers a tax charge. In reality, it’s not usually this simple because many people have a combination of defined contribution and defined benefit pensions, which they draw at different stages. Also some people will have protected a higher lifetime allowance.

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“But in this example, the surplus can be looked at in two ways. If you take the whole amount as a lump sum, an immediate 55pc tax is charged on the surplus [the £250,000 above £1.25m]. There is no income tax on top of this.

“Alternatively, if you take the surplus as an income, a 25pc tax charge is deducted. You are then liable for income tax on said income when you receive it.

“One way of looking at this is that if we assume that the recipient is a 40pc taxpayer, a 25pc lifetime allowance charge followed by a 40pc income tax charge on the balance works out as 55pc tax. This is because for every £1,000 of excess, a £250 lifetime allowance charge is deducted, leaving £750. After 40pc income tax that leaves £450, resulting in the same figure as the 55pc charge.”

 

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If you wish to register a complaint, please write to Mr Paolo Standerwick, Complaints Handling Officer at 17 Station Road, Belmont, Sutton SM2 6BX, email paolo@mlpwealth.co.uk or telephone 020 8296 1799.

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