For many people, Philip Hammond’s announcement that the Lifetime Allowance will be rising is welcome news.

As part of the Autumn 2017 Budget, the amount you can hold in a pension fund, without incurring taxes, will rise by £30,000; from £1,000,000 to £1,030,000, effective from April 2018. This is a welcome increase, considering that the Lifetime Allowance started at £1.5 million in 2006/7, rose to £1.75 million in 2010/11 and fell to £1 million, where it remained until the budget announcement.

But what does that mean for you?

Understanding the Lifetime Allowance

The Lifetime Allowance is the maximum amount you can hold in your pension, before tax will apply. This includes all forms of pension, including the capital value of any Defined Benefit pension plans.

Your pension is ‘tested’ against the Lifetime Allowance when certain trigger events occur. These include:

• When you move money into drawdown
• Death
• When lump sums are paid, including those paid in the event of ill health
• If you choose to transfer your pension fund to a qualifying recognised overseas pension scheme (QROPS)
• If your pension increases beyond a certain limit
• In some cases, when you reach the age of 75

If your pension value is above the Lifetime Allowance, the value by which it is over the threshold will be subject to tax at:

• 55% of lump sums
• 25% of pension income

Who will benefit from the increase, and how?

The rise in the Lifetime Allowance will affect most people who are saving, preparing and already receiving, their pension.

For those in the early stages of saving toward retirement, the increase should offer increased possibilities to make the most of your pension funds, in the future, whilst minimising the amount you lose in tax. Of course, the Allowance is not guaranteed to continue rising indefinitely, but this rise does signal an improvement.

If you will be reaching retirement age in the next few years, the rise could not have come at a better time for you. When your funds are crystallised, the total value will be checked against the new, higher rate. This means that you will be able to keep more of the money you have worked hard to save.

For those who are already retired and receiving their pension in some way, the Allowance rise will offer more flexibility in the amount you can access before incurring tax. However, if you have already exceeded the Lifetime Allowance, the rises will not affect you and it is best to seek professional advice to see how you can manage your remaining pension funds as tax-efficiently as possible.

For more information on how this affects you and tax-efficient methods of saving, contact us.

Please note:

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.