So, what is the pension lifetime allowance? It’s basically the maximum amount that you’re allowed to withdraw from your pension plans and schemes, tax-free. As the name suggests, it’s a lifetime, rather than annual or monthly, limit.

Am I liable?

The limit applies whether you use your pension as retirement income (i.e. you get it in instalments) or whether it’s withdrawn as a lump sum.

The limits also vary depending on the tax year. 

In the 2020/21 tax year, the limit is £1,073,100. (Random, right?) This amount excludes your state pension but applies to all other pension schemes that you’re a part of, including a defined benefit pension from your employer. 

What’s a defined benefit pension? 

A defined benefit pension is a private pension that you’re paid after retirement by your employer, based on your salary and how long you worked there. 

What happens if I go over the pension lifetime limit?

If you do go over this limit, you’ll be liable to pay Income Tax on your pension withdrawals. You can work out how likely it is that you’ll be in this situation by working out the following:

1. Work out how many eligible pension schemes you’re part of
2. Calculate the total value of all of them together
3. If it’s over the limit, you will be charged Income Tax on your payouts

Defined contribution pensions vs. defined benefit pension

The way you calculate these two types of pension is different. 

• Defined contribution pension

You calculate this by adding the value of your retirement pension pot with any lump sum you’re due to receive. 

• Defined benefit pension (a.k.a a final salary pension)

This is based on your salary at the point at which you retire. The way you calculate the total amount will depend on the rules of the scheme e.g. how long you worked at the workplace, your salary etc. Read more here. 

What do I owe?

• Lump sum – 55% for the portion over the lifetime allowance
• Instalments – Income Tax plus 25% for the portion over the lifetime allowance