Lifetime Allowance – could your clients be exposed to this painful tax charge?

While Britain was still grappling with the immediate financial effects of the Covid pandemic in March 2021, the then chancellor, Rishi Sunak, froze the Lifetime Allowance (LTA) until 2026. According to Money Marketing, the freeze is likely to result in significantly more people being affected by the LTA, as their pension pots continue to potentially grow.

The article reveals that nearly 30,000 people are predicted to be caught by the LTA, which will raise nearly £1.5 billion for the government by 2025. Because of this, your clients may now be facing an LTA charge, or could become liable to it in the future.

It may not be all bad news though, as a financial planner might be able to help them side-step any potential charge. Read on to find out what the LTA is, why your client may be exposed to a significant tax charge, and ways they might be able to reduce or negate their liability.

The LTA limits the amount of tax benefits your client’s pension has

While your client is allowed to have any amount in their pension pot, the LTA restricts the amount of tax-efficient pension savings they can build over their lifetime. This means that any money that they take from their pension that’s above the £1,073,100 allowance becomes liable to a tax charge, which varies depending on how they draw the money.

If it’s taken as income, they will typically be liable to a 25% tax charge, and if it’s taken as a lump sum, it will be liable to 55%. While your client can draw up to £1,073,100 before facing an LTA charge, a feature in Money Age makes for sobering reading as it reveals that the average worker is on track to exceed the LTA by the age of 64–65.

One reason for this is that the LTA covers all of your client’s pension benefits. This means that if they have a defined contribution (DC) pension, their contributions, their employer’s contributions and any tax relief received will be taken into account.

Furthermore, as DC pensions are typically invested, it will also include investment returns. As you can see, calculating whether your client could be liable to a charge is complicated, and getting it wrong could be expensive.

That’s why speaking to a financial planner could be a good idea. As well as confirming whether your client is exposed to the tax, a planner can also look at ways to reduce it, something we will consider now.

Reduce or stop pension contributions

If your client is close to their planned retirement date and at risk of becoming liable to an LTA charge, they may want to consider stopping their contributions. If they are already liable to a charge and still contributing towards their pension, discussing whether they should stop future contributions with a financial planner could be a good idea.

A planner will be able to confirm how liable your client is to an LTA charge, and the options that might be available to them, such as retiring early. Alternatively, your client might want to switch contributions into other investments such as a tax-efficient Stocks and Shares ISA, which could also expose their money to future potential growth.

This could help ensure your client enjoys the lifestyle they would want in retirement.

Use LTA protection if you are eligible

When the LTA was introduced in 2006 it stood at £1.5 million, after which it rose to £1.8 million. By the 2016/17 tax year it had dropped to £1 million, and in 2018/19 it was linked to the Consumer Price Index. Then in 2021 it was frozen until 2026.

As the LTA threshold was higher in previous years, the government provided some protection for those with more substantial pension pots. While many of these protections are no longer available, your client may be able to apply for protection if their pension savings exceeded £1 million on 5 April 2016.

If successful, your client’s LTA could increase to £1.25 million. A financial advisor will be able to confirm whether they are eligible or not.

Divorcing clients might be able to reduce their LTA

Clients should never look at divorcing as a way to reduce their exposure to an LTA tax charge. If they are already divorcing though, they may want to consider speaking to a financial planner about potentially reducing their exposure to an LTA through pension splitting.

To find out more about how pension splitting may be able to help a divorcing client with an LTA liability, read our blog.

Get in touch

If you or your client would like to confirm whether they face an LTA charge, or could do so in the future, contact us on or call 01904 655 330. As we are an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can have peace of mind that you will receive excellent advice and the highest quality service.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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.

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