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Lifetime Allowance
The lifetime allowance is the total amount you can build up in all your pension savings throughout your working life without incurring a tax charge. The current lifetime allowance is £1,073,100 and anything above this amount will result in an individual paying additional tax at retirement.
At certain times your pension provider/ administrator will check to see if the value of your pension benefits is over the lifetime allowance.
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What’s happened? The Chancellor announced in March 2023 that the lifetime allowance would be scrapped in April 2024 so that individuals can build up as much pension as they like without facing a tax surcharge.
Annual Allowance
The annual allowance is the most you can save in your pension pot in a tax year (6 April to 5 April) before you have to pay tax. The annual allowance has changed several times since it was introduced in 2006 and was £40,000 up until 5th April 2023.
Depending on the type of pension arrangement you are contributing to will determine how your allowance is calculated:
1. For Defined Contribution Pension Schemes the calculation is the total contributions paid in any pension input period (year) which includes all individual and employer contributions
2. For Defined Benefit Pension Schemes the calculation is based on the level of benefits built up (accrued) in an input period (year) and not contributions. The calculation is generic across all schemes and can be requested from your scheme administrator.
While there may be an argument that the increase in the Annual Allowance from £40k to £60k would be welcomed by some members of Defined Benefit pension schemes, where you are more likely to build up a greater level of pension in an input period, the fact remains that the proposed removal of the Lifetime Allowance will only really benefit the wealthy and will do absolutely nothing to assist the poorest in our society.
We are advised that the average worker would have to save for 400 years to benefit from the scrapping of the Lifetime Allowance which creates further inequality!
It is proposed by the Labour Party that if they were to get into power they will reverse the decision to scrap the Lifetime Allowance. This we will have to wait and see.
