What is the pension Lifetime Allowance?

Any amount over your Lifetime Allowance taken as a lump sum, for example, will be taxed at a flat rate of 55%, whereas if you make cash withdrawals via drawdown or receive the money as regular pension payments, instead of the flat rate of 55%, you’ll be taxed an additional 25% on top of any regular income tax payable on your pension income.

If, for example, if you want to crystallise your pension and take a £10,000 lump sum from it, and it has a value of £1,083,100, tax will be applied to the £10,000 which is in excess of the £1,073,100 Lifetime Allowance. If you take the £10,000 as a lump sum you’ll pay £5,500 tax (55%), but if you take it as income through drawdown or an annuity you’ll pay £2,500 (25%), plus income tax.

There are various other pension allowances you need to get to grips with too. For example, in addition to the Lifetime Allowance, there is also a pensions Annual Allowance, where most of us can pay up to a maximum of £40,000 a year into our defined contribution pensions. However, once you’ve started taking money out of your pension, this Annual Allowance falls from £40,000 to £4,000 and becomes known as the Money Purchase Annual Allowance (MPAA). You will still receive tax relief on any new top up savings up to the £4,000 limit. You can learn more about how the various pension allowances work in our article Understanding your pension allowances.

Author: wpadmin

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