The Lifetime Allowance is a tax limit on your retirement savings. There is no limit to the benefits you may build up towards your retirement – however, you will pay additional tax on any pension benefits that exceed the Lifetime Allowance when they come into payment. The Lifetime Allowance is currently £1,073,100 for tax year 2021-2022.

Benefits from registered pension arrangements provided by DXC, any previous employer(s) and/or any personal pension arrangement(s) count towards the Lifetime Allowance.

How to work out whether this tax charge applies to you?

Every time you start taking a pension from one of your plans, its value is compared against your remaining Lifetime Allowance to see if there’s extra tax to pay.

You can work out whether you’re likely to be affected by adding up the expected value of your pensions to see if they might go over the Lifetime Allowance.

What are the charges if you exceed the Lifetime Allowance?

If the total value of your pension benefits exceeds the Lifetime Allowance when a check is done, there will be tax to pay on the excess.

Lump sums

If you take the excess as a lump sum, it’s taxed at 55%. The Plan’s administrators would deduct the tax and pay it to HMRC, paying the balance to you.

Income

If you keep the money in a pension so you can take an income from it – either flexibly (pension drawdown), as a guaranteed income (annuity), or as a scheme pension – there’s an immediate 25% tax charge. This is on top of any Income Tax you pay on the income you receive.

For the DXC Money Purchase section, the Plan’s administrator would pay the 25% tax to HMRC from your pension pot, leaving you with the remaining 75% to use towards your retirement income.

Example: someone who pays tax at the higher rate expected to get £1,000 a year as income but the 25% Lifetime Allowance charge reduced this to £750 a year. After Income Tax at 40%, they would be left with £450 a year.

This means the Lifetime Allowance charge and Income Tax combined have reduced their income by 55% – the same as the Lifetime Allowance charge if they had taken their benefits as a lump sum instead of income.

It is your responsibility to monitor your total benefits (from all sources) against the Lifetime Allowance. Employees should notify the Plan’s administrators if either of the following circumstances apply:

  • You have any form of Pensions Protection from HMRC; or
  • The value of your total pension benefits (including the estimated value of your death-in-service benefits provided by the Plan) exceed, or are close to the standard Lifetime Allowance (LTA), currently £1,073,100. Contact us using the details on the homepage.