What to do when you might exceed the lifetime allowance

There’s much to consider when trying to build your retirement fund efficiently, and that includes your pension lifetime allowance.

This can pose many challenges if you feel you might exceed the lifetime allowance, and you may worry about how this can impact your wealth.

Read this article to learn what the lifetime allowance is, how it can impact your finances, and how various tips – such as diversifying investments and seeking a modern wealth management firm – can help you approach it effectively.

What is the lifetime allowance?

The lifetime allowance is the amount you can save in your pension pot while still sheltering your money from any tax charges

. This limit applies throughout your entire lifetime.

In the current tax year, 2022/2023, your lifetime allowance is £1,073,100. Therefore, when your retirement fund stays below this amount, you’ll receive shelter from tax. If, however, you exceed this limit, tax charges may be applied.

While this allowance applies to your whole lifetime, you must still abide by the annual pension allowance, which is the amount you can save tax efficiently each year – currently £40,000 a year.

How can exceeding the lifetime allowance impact your finances?

If you exceed your lifetime allowance limit, you could have tax charges applied to your savings above that limit.

The rate at which your pension pot is taxed will vary depending on how you choose to receive your money:

  • If you receive your pension savings as a lump sum, you’re taxed at a rate of 55%.
  • If you receive your pension savings through other methods, e.g., pension payments or cash withdrawals, you’re taxed at a rate of 25%.

This is why it’s essential to adopt the best approach to your lifetime allowance, since it can greatly determine how well you shelter your retirement fund from tax.

How to best approach your lifetime allowance

If you’re concerned about exceeding the lifetime allowance for your pension, here are some of the things you can do:

  • Seek guidance from your wealth manager

An effective way to manage your lifetime allowance is to seek guidance from a modern wealth manager.

Your expert adviser can guide you on your pension contributions to make sure you’re sheltering as much from tax as possible, and navigating your allowances efficiently.

An adviser will also take into account any challenges or concerns you might have regarding your retirement savings. They can offer unique advice that addresses your current financial circumstances, and give you the best approach to building your wealth to achieve your goals.

  • Diversify where you shelter your investments

Another thing to consider when reaching your lifetime allowance is whether you might benefit from diversifying where you shelter your investments.

An expert adviser can help you explore other opportunities for tax-efficient saving if you do exceed your lifetime allowance.

For example, you might consider saving money into an individual savings account (ISA) – giving you a further £20,000 (as of the current tax year) of tax-free savings each year. 

Therefore, you can still continue to build your retirement fund with as much money sheltered from tax, even if you start to exceed the lifetime allowance.

With the right wealth manager to advise you, you no longer need to feel anxious about exceeding the lifetime allowance, but instead, feel confident that you and your adviser can develop an optimised approach to help you meaningfully build your wealth.

Please note, the value of your investments can go down as well as up.