The pension lifetime allowance is the maximum you can build up in a pension fund before being hit with extra tax charges. The government sets the rules that affect all pension savings, including workplace and private pensions as well as self-invested personal pensions (SIPP). The SIPP lifetime allowance is currently £1.073 million and is frozen until at least 2026.
In this guide, we take a look at some key details you need to know about the SIPP lifetime allowance. We also see what happens if you go over your SIPP lifetime allowance and whether or not you can avoid reaching it.
A SIPP lifetime allowance means you’ll be hit with a hefty tax charge if your pension pot exceeds the lifetime allowance. The lifetime allowance is £1.073 million in 2021–2022 and is frozen until 2026.
The rules don’t stop you from saving over the lifetime allowance in your pension pot. However, it makes sense for most people to keep their pension savings below the lifetime allowance.
The lifetime allowance rules cover all types of pension, including SIPPs, workplace pensions and other private pensions. If you think you’re at risk of breaching the lifetime allowance limit, you should get advice from an independent financial adviser on how to minimize your tax bill.
Every time you withdraw money from your pension, you will use up part of your SIPP lifetime allowance.
For example, if you withdraw £100,000 from your pension tax-free, this will be checked against the lifetime allowance. You will use up 9.3% of your lifetime allowance (£100,000 as a percentage of £1.073 million).
If your pension pot goes over your SIPP lifetime allowance then nothing usually happens straight away. You’ll need to pay an extra tax charge on the excess amount over your lifetime allowance when you withdraw your pension or when you reach 75 years old.
The lifetime allowance charge is based on the excess pension above your lifetime allowance. The lifetime allowance charge is currently 25% if you take your pension as income (through an annuity or regular cash withdrawal) and 55% if you withdraw a lump sum.
The tax charge will be collected through your pension provider when you withdraw your pension or hit 75 years old. It is in addition to any income tax charged on your pension income.
Your pension will be checked at the following points to see if you have breached the lifetime allowance:
After you’ve reached age 75, there are typically no further checks against the lifetime allowance.
The lifetime allowance won’t affect most SIPP pension savers. But if you have a large amount of pension savings or a generous defined benefit pension, it’s worth working out if you’re getting close to your lifetime allowance.
Depending on your circumstances, if you’re at risk of breaching the lifetime allowance, it can affect your retirement planning. It may make sense to save for retirement using a different investment vehicle, such as a stocks and shares individual savings account (ISA). See a financial adviser for tailored pension planning advice.
The lifetime allowance is currently frozen at £1.073 million until 2026. However, it has varied in the past. It was £1.5 million in 2006–2007 when it was introduced and then went down to £1 million in 2016–2017. In 2018–2019 the lifetime allowance was £1.03 million. In 2019–2020 it was £1.055 million and in 2020–2021 it was 1.073 million.
The government may decide to change the lifetime allowance rules in the future.
The lifetime allowance rules include all registered pension schemes, but the value of pensions is calculated differently for defined contribution and defined benefit pensions.
Add the value of all your pension pots to work out the value of your defined contribution pension schemes, including SIPP pensions.
For defined benefits schemes where you have an agreed income based on your salary, you calculate the value of your pension by multiplying your expected pension by 20. You also need to add on any lump sum received and any separate defined contribution pension pots.
For example, Sean has a local government-defined benefit pension of £20,000, a tax-free lump sum of £30,000 and a separate SIPP pension pot of £100,000. Multiply the defined benefit pension by 20, and then add the lump sum and SIPP amounts to that and his total pension value is £530,000.
There are some circumstances where it may be worth exceeding the lifetime allowance. However, UK tax law is complicated and you should speak to an independent financial adviser or a solicitor for advice based on your situation.
You may decide to breach the lifetime allowance if the following apply:
The lifetime allowance was £1.25 million in the 2015–2016 tax year and it has been reduced since then. However, it may be possible to protect and increase your lifetime allowance using the following methods:
If you are considering applying to protect your lifetime allowance, then speak to an independent financial adviser to make sure you choose the most suitable option for your circumstances.
Speak to a financial adviser if you think you might breach the lifetime allowance. They will be able to assess your circumstances and advise you on the best course of action. If you have a generous defined benefit pension, you may still decide to keep paying in and breach the lifetime allowance.
Here are some possible ways to avoid breaching the lifetime allowance:
If you’re lucky enough to have saved a decent pension pot worth around £1 million, you should start doing some pension planning. You may get hit with some hefty tax charges if you sit back and do nothing.
Even if you have a smaller pot, it makes sense to understand the lifetime allowance rules. A smaller pot worth £700,000 could breach the lifetime allowance if there’s a bull market and your pot grows by 10% for 5 years.
Get financial advice to work out the best options for you. You may decide to stop paying into your pension and focus your future savings in stock and shares ISAs or buy investment properties instead.
Even if your pension wealth isn’t getting close to £1 million, it’s still worth getting your head around the lifetime allowance rules. You may need to do some pension planning in the future once you do have a bigger pension pot.
If your pension wealth is getting close to £1 million, contact an independent financial adviser to discuss your pension planning and retirement options. They will be able to advise on whether you’re likely to breach the lifetime allowance, how you can avoid it and how to minimize your tax bill. It could save you some serious money in the long run.
| Response | |
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| Yes | 72.29% |
| No | 27.71% |
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