Every time you access your savings and when your pension schemes start to make payments to you, the value of that new payment is compared against your remaining lifetime allowance to see if there’s any additional tax to pay. You can work out whether you’re likely to be affected by adding up the expected value of your pensions.
For anyone in excess of the lifetime allowance, tax is currently charged at 55% if savings are taken as a lump sum. To take savings as a regular income, such as an annuity, this is 25% although this is on top of their usual income tax applied to the regular income.
In some circumstances you may be able to protect your lifetime allowance. Over the last few years, the lifetime allowance has been cut several times (it has been reduced in stages from £1.8m to £1,073,100). Every time it has been reduced, the government has allowed savers to ‘protect’ their pension at the level of the previous higher allowance if their pension savings were more than the new lower allowance. However, some forms of protection options (eg enhanced protection and fixed protection) have meant that you won’t be able to put any more money into your pension pot. If you have any queries about the lifetime allowance, you should seek advice from a financial adviser.