Total tax collected from exceeding the pension Lifetime Allowance is set to reach almost £1.5 billion annually

A couple reviewing paperwork together.

Successive cuts to the Lifetime Allowance (LTA) and a freeze means that more people than ever could face an unexpected tax bill when they access their pension.

The LTA is the total amount a person can build up in pension benefits without incurring tax charges. Since it was introduced in the 2006/07 tax year, there have been several cuts to the allowance, and it’s now frozen until 2026.

As a result, more people are being affected by the LTA and the amount the government has collected through the charges has increased.

Could you unexpectedly exceed the LTA?

The LTA covers all your pension benefits, not just your contributions. So, it can be easier than you may think to exceed it unexpectedly.

If you have a defined contribution (DC) pension, your total pension benefits will include your contributions, those made by your employer, and tax relief. As your pension is usually invested, it will often include investment returns.

As a result, you will need to consider how the value of your pension will change over the years. Even if you stop pension contributions, the value may continue to grow.

If you have a defined benefit (DB) pension, you normally calculate the total value by multiplying your expected annual income when you start to collect your pension by 20. If your DB pension also provides a lump sum, this will need to be included in the calculation.

As you may not check your pension regularly and it can be difficult to understand how the value will change over what could be decades, it is possible to unexpectedly exceed the LTA.

Pension benefits above the LTA could be subject to a 55% tax charge

Your pension will usually be tested to see if it exceeds the LTA when you access your pension or on your 75th birthday whether you are taking the pension benefits or not.

Even if you exceed the LTA, you will not face additional charges on the amount below the threshold. For pension benefits above the LTA, the rate of tax will depend on how you access your savings:

  • If you take an income from your pension, the tax rate is 25%.
  • If you take a lump sum from your pension, the tax rate is 55%.

As a result, it’s important to understand how your decisions to access your pension will affect the amount of tax you pay and the effect it will have on your income.

While the potential tax charge may mean you’re tempted to halt pension contributions if you’re nearing the LTA, this isn’t always the right solution.

In some cases, you may still benefit overall, for example, once you factor in long-term investment returns. Opting out of a pension scheme may mean you lose other benefits too. For instance, if your scheme would provide an income for your partner or children if you passed away.

In the last 5 years, the amount collected from the LTA has increased, on average, by 28% a year

Since its introduction, the total value charged from the LTA has increased every year, according to a Money Marketing report. Over the last five years, the amount collected has increased by an average of 28% each year.

The rise is due to cuts in the LTA. In 2006/07, the LTA was £1.5 million and reached a peak of £1.8 million in 2010/11. Over the last decade, the LTA has gradually reduced and is now £1,073,100.

By 2025, it’s estimated that the total LTA tax collected will reach almost £1.5 billion.

While the LTA isn’t expected to fall between now and 2026, in real terms, the freeze means its value is falling. As the allowance won’t be rising in line with inflation, more people are likely to exceed the LTA.

If your pension benefits are nearing the LTA, it doesn’t mean you should automatically stop pension contributions. However, it’s important to be aware of the allowance and the potential charges you could face.

If you’re worried about exceeding the LTA, it’s important to review your options and how your pension fits into your financial plan. Please contact us if you have any questions or would like to discuss your retirement.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.