When is the right time to start thinking about the pensions lifetime allowance?
According to new calculations from Quilter, careful consideration should be given to the lifetime allowance once you have a pension pot worth more than £500,000.
A combination of factors has made the lifetime allowance, which imposes a tax charge on excess pension savings, a more pressing concern for pension savers.
The Treasury initially reduced the level of the lifetime allowance, before freezing it during the Budget last month at its current level until April 2026.
A frozen pensions lifetime allowance means that more pension savers will fall foul of the tax charge in the future, by virtue of rising asset values.
The Lifetime Allowance currently stands at £1,073,000 until the end of the 2025/26 tax year.
While this is a big number, and feels beyond the level of concern for many pension savers, the numbers crunched by Quilter suggest that a pension pot of £500,000 could trigger a Lifetime Allowance tax charge in the future.
Assuming the Lifetime Allowance remains unchanged until 2026/27, and then increases in line with the Consumer Prices Index (CPI) measure of price inflation thereafter, at an assumed level of 2% a year, a pension pot worth £840,802 today, growing at 5% a year net of charges, could reach the level of the Lifetime Allowance.
For a pension pot to reach the Lifetime Allowance in 10 years, it would need to be worth £658,790 today. And a pension pot of £516,179 today would exceed the Lifetime Allowance in 15 years.
Younger pension savers should be even more conscious of these Lifetime Allowance planning concerns, with a pot worth £248,291 today at risk of breaching the limit in 30 years.
Ian Browne, retirement planning expert at Quilter, said:
While a £1m in your pension pot sounds like a very large pot of money to many clients, advisers know that thanks to investment and compound interest that number can be easier to hit than people may think.
Our calculations show that someone with a £500k or £600k pension pot and are 15 years from retirement will be forced to hand over some of their hard-earned cash to the taxman. This is assuming 5% net investment growth and doesn’t take into account any personal or employer contributions which will substantially speed up growth.
The Lifetime Allowance is tested when you withdraw money from your pension, reach age 75, or transfer your pension pot overseas.
The tax charge is 55% if you take pension benefits as a lump sum or 25% if you receive pension payments or cash withdrawals.