The pensions lifetime allowance effectively caps the amount that can accumulate in a person’s pension fund and be extracted with favourable tax treatment. This covers all contributions paid in and any organic growth in the fund.
Where the lifetime allowance (currently £1,073,100) is exceeded the pensioner must pay a lifetime allowance charge when they access their pension pot. This tax charge applies to the excess above the lifetime cap and is charged at 25% on amounts drawn as a regular pension and at 55% on amounts drawn as a lump sum.
The Chancellor announced that the lifetime allowance would be abolished – probably in 2024 – but in the meantime the lifetime allowance charge would not apply from 6 April 2023.
This will allow pension savers to build up unlimited pension pots which are protected from tax while within the fund.
Currently any pension saver can take a tax-free lump sum of up to 25% of their pension fund once that individual reaches the minimum pension age for the fund. However that tax-free lump sum will now be limited to a maximum of £268,275, so if the fund grows to more than £1,073,100 the pensioner cannot avoid tax on a full quarter of the total fund.
A word of warning: the Labour Party has pledged to reinstate the pension lifetime allowance cap if they come to power after the next General Election. Those with large pension savings may want to plan to extract funds before the date of the first Labour Budget, if or when that happens.