The size of the pension pot you can build up without incurring a hefty tax charge could soon be increased ⬇️ What you need to know:
The case first went to court in November 2021, when the High Court ruled in favour of the DWP. It did so again in an appeal decided on Tuesday The size of the pension pot you can build up without incurring a hefty tax charge could soon be increased as the government looks to lure over-50s back into the workforce.
Increasing the pensions lifetime allowance — the limit on how much you can save tax-free, currently set at £1.073 million — is being considered as a way to fix the issue. Here’s how the cap works, and how to tell if you’re on your way to breaching it.Introduced in 2006, the lifetime allowance is a limit on how much can be saved into and built up across your pension savings, so it covers all your pensions and takes into account any employer contributions and investment growth.
The figures assume 4 per cent investment growth after fees, that the threshold increases by 2 per cent a year from 2026 and their contributions increase by 2 per cent a year. If they had higher investment growth of 6 per cent a year, their contributions would need to start at £8,500 a year for them to be at risk of breaching the lifetime allowance.
Your pension is tested against the lifetime allowance at various points throughout your retirement, including when you move part or all of your pension into drawdown , use it to buy an annuity , and when you turn 75. As £400,000 is 37.27 per cent of the £1,073,100 threshold, you would have used up 37.27 per cent of your allowance. The next time you access your pot, the same test is done. If you end up using all of your allowance, HMRC will write to you and the charge will be taken from your pension.
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