What is the lifetime allowance for pensions in the UK?

One of the smartest ways to invest and save money for the future, it’s little surprise that the majority of us will put aside funds to make contributions to our pension at some point in our lives so we have plenty of money left over to fund our retirement.

But while it’s a sensible idea to invest as much as feasibly possible into your pension, without affecting your standard of living, it’s not necessarily advisable to invest huge lump sums into your pots in one go.

All pensions are restricted by what’s known as a pension annual allowance, and a pension lifetime allowance, which govern how much you can contribute to your pension yearly and in total.

To help explain what this involves, and to make it easier for you to optimise your pension budget, we’ve broken down what you need to know about these core pension areas and how to plan around them.

What is the pension lifetime allowance in the UK?

As of 2022/23, the total lifetime allowance enforced on UK pensions is £1,073,100. However, this is not a limit on the total amount of funds your pension can hold. Instead, it represents the maximum value your pension can attain before you are taxed on the benefits it provides.

In essence, the pension lifetime allowance is in place to ensure higher earners contribute an increased level of appropriate tax should they wish to top their pension up beyond the average limit.

What this means is that, if your pension goes above the lifetime limit, you will be charged 55% tax on any lump sum you withdraw, or 25% tax on any instalments it pays out. Though once your pension drops below the threshold, this extra taxation will be stopped.

In most cases, it is usually not recommended to go over the lifetime limit for your pension unless you’re going to have access to multiple income streams when you retire. Fortunately, with the allowance being so high, most people do not need to worry about reaching this threshold.

What is the maximum pension contribution in the UK?

There is no maximum pension contribution in the UK, and you are free to contribute as much as you want so long as it falls within the rules of your pension plan. However, while you may contribute as much as you want to your pension, you will cease to receive tax relief after a certain point. This is because of the UK’s annual pension allowance.

What is the UK’s annual pension allowance?

For 2022/23, the current pension annual allowance in the UK sits at £40,000, but like the lifetime cut-off, this does not mean that you can only contribute up to £40,000 per year towards your pensions.

Instead, your annual limit is a combination of your contributions, those of your employer, and anyone else helping to pay into the pension in question. Once this limit is breached, all further payments will be taxed to the degree that would eliminate the bonus funds provided by your tax relief benefits.

However, your annual allowance is more complex than just sitting at £40,000. This value is actually the upper limit of the allowance range, and your actual allowance will either be £40,000, the equivalent of 100% of your overall earnings in a year, or £3,600, whichever is greater[1] . If you are a high earner with income exceeding £200,000 per year, your annual allowance could be as low as £4,000 due to tapered annual allowance.

What is important, however, is that if you do want to pay over your allowance and still receive tax relief, you may be able to carry forward excess, unused allowance from the past three years, provided you have already used up the current year’s allowance. This can be exceptionally useful for those on a variable income.

If you’re unsure whether going over the annual limit is good for you, it’s recommended you speak to a financial advisor, such as those on the Blacktower team.

What is the minimum pension contribution I can make?

We’ve mentioned a lot about the maximum contributions you can make to your pension, but what about your potential minimum pension contribution?

For most cases, this will be governed by your pension plan, and it is best to speak to your providers about how little or much you want to pay. Of course, with additional voluntary contributions, there are no restrictions, and you can pay however much you feel comfortable contributing. However, it is important to bear in mind that, depending on your personal circumstances, you could face limits on the tax relief that these additional contributions attract.

Can I change the amount I contribute to my pension?

Yes, it is possible to change how much you’re investing into your pension with each contribution. Speak to your provider for more information about how to do this.

How much should I pay into my pension?

At the end of the day, how much you pay into your pension is entirely up to you. The more you contribute, the more funds you’ll have come retirement to fulfil all your plans, but that’s no reason to sacrifice the benefits offered by going over the established limits.

In general, it’s recommended that you put away a portion of your income each month to steadily increase the total of your pension fund. Even if that’s a small amount, it will still add up in the long run.

There is, of course, much more to pensions than their maximum limits, and you can read more on these topics by visiting our pension hub. From the different pension types to advice on saving for retirement , our hub has everything you need to know.

Here at Blacktower, we also specialise in other areas of finance, including for expats looking to move abroad. Get in touch with our staff for advice on SIPPS and QROPS, as well as any questions you might have on international pensions.

This communication is for informational purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained  in this communication is correct, we are not responsible for any errors or omissions.