A Simple Guide About Lifetime Allowances in 2021

Charlotte Miller

Updated on:

What is Pension Lifetime Allowance?

So, you are retiring this year but have a few questions about pension arrangements? You need to know what pension lifetime allowances are, and you can learn to manage them in no time.

In essence, a lifetime allowance is the limit of tax-privileged pension funds anyone can gather during their lifetime before a hefty tax charge gets applied. So, if you have exceeded the allowance limit, you have to pay the government particular tax money at certain times. Naturally, you would want to monitor your savings and how far or closer they are to the limit.

These are a few tips and tricks to manage your pension funds and savings intelligently:

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How Much is the Lifetime Allowance?

Lifetime Allowance (LTA) is not a fixed entity, and it changes depending upon inflation. For the fiscal year 2021-2022, because the inflation was 1.7% in 2019, the lifetime allowance for most people was increased to £1,073,100 ($1,489,258.91). 

In this year’s budget, the allowance limit was frozen at this amount until April 2026 (the fiscal year 2025-2026).

Despite not being a fixed sum, it applies to all of the pensions you have gathered up in your lifetime, and that includes:

  • Your savings (other than the State Pension)
  • Job benefits

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Pension Lifetime Allowance Checks

Whenever you are doing the following activities or reach the criteria under the circumstances, your pensions will be compared with the limits to see if you are eligible for the tax. These include:

  • When drawing a defined benefit pension
  • While taking a lump sum from a defined contribution pension
  • When you reach 75 years of age and have a pension in drawdown or have not used
  • If you die less than the age of 75
  • If you transfer pension overseas before the age of 75

After the age of 75, there are no further checks against the lifetime allowance in most cases.

Managing Your Pension Lifetime Allowance 

To avoid the hefty tax charge, the most logical thing you can do is monitor the pensions closely to ensure it does not cross the limit. If you are smart about your money, you will invest in avenues that properly guide you about pensions and the issues that come with them. Here are some other ways recommended by experts to protect your pension lifetime allowance, and they include:

  • Individual Protection 2016
  • Fixed Protection 2016

Individual Protection 2016 allows anyone whose pension rights are valued over £1 million to protect those rights, with an overall maximum of £1.25 million. In this case, you can keep building up your pensions but have to pay tax for all the pensions that exceed the protected lifetime allowance.

Fixed Protection 2016 fixes an individual’s lifetime allowance to protect their savings at £1.25 million after April 2016. However, if you put money into a pension once you have fixed protection, you will lose it.

You can apply for any of the protection services via the government’s website.