Inflation and your pension lifetime allowance

In the UK, the pension lifetime allowance has been frozen at £1,073,100 until 2026, rather than rising with inflation. This could become an issue for investors who are set to build up one or many pension savings over their career. Due to the current inflationary rates, which are predicted to peak at 10% by the end of 2022, wage increases are likely, which, for most people, will also mean higher contributions to their pension savings. With the current freeze on the lifetime allowance, coupled with high inflation, investors may inadvertently find themselves hitting this figure.

first-time investors

Cost of living meets lifetime allowance

For those entering retirement at a time where the cost-of-living has spiked, there may be the need to access more from their pension, both at the outset and over the course of their retirement. Your pension lifetime allowance is based on the maximum fund you can accumulate without being penalised. Due to this, investors may find themselves in a catch-22 where they require increased pension savings to counter the rise in cost of living, but they will then face a hefty tax charge for these increased savings.

What will I be taxed if I exceed my lifetime allowance?

If your pensions are collectively worth more than the lifetime allowance, you’ll usually face an extra tax charge on the excess amount drawn. How much this charge is will depend on how much you exceed the limit by and how you take your pension.

For example, if your pension pot totals £1,200,000 it will currently be in excess by £126,900. If you choose to take a lump sum from your pension, this excess will be taxed at 55%. If you take it any other way, such as through drawdown or buying an annuity, this excess will be charged 25% tax . in addition to the income tax due on the income.

Should I keep contributing to my pension savings?

It is good practice to keep monitoring your pension savings to see if you are approaching your lifetime allowance. You can ask your pension provider(s) to give you an up-to-date valuation of your pension. Do make sure you have tracked down all of your current pension pots, as you may have some from earlier employments that you’ve forgotten about.

Generally, the risks of not paying into your pension outweigh the potential penalty associated with hitting your lifetime allowance. Diversifying into other tax efficient savings alongside your pensions may be sensible. But if they come at the expense of losing your employer pension contributions and tax relief, they are unlikely to be the most financially prudent option.

A financial adviser can help you to predict if your pension savings are likely to exceed your lifetime allowance. An IFA can also help you to find the most tax-efficient saving options going forward, so you can plan for your retirement alongside the current inflationary pressures.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.


Please share if you know someone who might find this article interesting or useful

Contact Form

Please complete this form if you wish to send us your questions or if you would like to request a call back.

We look forward to speaking with you.

Recent GWM articles that may be of interest