SIPP lifetime allowance

We reveal what you need to know about the SIPP lifetime allowance rules and how to avoid a hefty tax charge.

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The pension lifetime allowance is the maximum you can build up in a pension fund before being hit with extra tax charges. The government sets the rules that affect all pension savings, including workplace and private pensions as well as self-invested personal pensions (SIPP). The SIPP lifetime allowance is currently £1.073 million and is frozen until at least 2026.

In this guide, we take a look at some key details you need to know about the SIPP lifetime allowance. We also see what happens if you go over your SIPP lifetime allowance and whether or not you can avoid reaching it.

What is a SIPP lifetime allowance?

A SIPP lifetime allowance means you’ll be hit with a hefty tax charge if your pension pot exceeds the lifetime allowance. The lifetime allowance is £1.073 million in 2021–2022 and is frozen until 2026.

The rules don’t stop you from saving over the lifetime allowance in your pension pot. However, it makes sense for most people to keep their pension savings below the lifetime allowance.

The lifetime allowance rules cover all types of pension, including SIPPs, workplace pensions and other private pensions. If you think you’re at risk of breaching the lifetime allowance limit, you should get advice from an independent financial adviser on how to minimize your tax bill.

How does SIPP lifetime allowance work?

Every time you withdraw money from your pension, you will use up part of your SIPP lifetime allowance.

For example, if you withdraw £100,000 from your pension tax-free, this will be checked against the lifetime allowance. You will use up 9.3% of your lifetime allowance (£100,000 as a percentage of £1.073 million).

What happens if I go over my SIPP lifetime allowance?

If your pension pot goes over your SIPP lifetime allowance then nothing usually happens straight away. You’ll need to pay an extra tax charge on the excess amount over your lifetime allowance when you withdraw your pension or when you reach 75 years old.

What is the lifetime allowance charge?

The lifetime allowance charge is based on the excess pension above your lifetime allowance. The lifetime allowance charge is currently 25% if you take your pension as income (through an annuity or regular cash withdrawal) and 55% if you withdraw a lump sum.

The tax charge will be collected through your pension provider when you withdraw your pension or hit 75 years old. It is in addition to any income tax charged on your pension income.

When does it apply?

Your pension will be checked at the following points to see if you have breached the lifetime allowance:

  • When you start drawing a defined benefit pension.
  • If you take an income (buy an annuity or set up an income drawdown) or lump sum from a defined contribution pension.
  • If you transfer a pension overseas before you reach age 75.
  • When you reach 75 year old and have a pension that you haven’t touched or is in the income drawdown phase.
  • If you die before age 75 and have pensions you haven’t used.

After you’ve reached age 75, there are typically no further checks against the lifetime allowance.

How will the lifetime allowance affect my SIPP?

The lifetime allowance won’t affect most SIPP pension savers. But if you have a large amount of pension savings or a generous defined benefit pension, it’s worth working out if you’re getting close to your lifetime allowance.

Depending on your circumstances, if you’re at risk of breaching the lifetime allowance, it can affect your retirement planning. It may make sense to save for retirement using a different investment vehicle, such as a stocks and shares individual savings account (ISA). See a financial adviser for tailored pension planning advice.

Does the SIPP lifetime allowance change every year?

The lifetime allowance is currently frozen at £1.073 million until 2026. However, it has varied in the past. It was £1.5 million in 2006–2007 when it was introduced and then went down to £1 million in 2016–2017. In 2018–2019 the lifetime allowance was £1.03 million. In 2019–2020 it was £1.055 million and in 2020–2021 it was 1.073 million.

The government may decide to change the lifetime allowance rules in the future.

Does the lifetime allowance change depending on the pension?

The lifetime allowance rules include all registered pension schemes, but the value of pensions is calculated differently for defined contribution and defined benefit pensions.

Add the value of all your pension pots to work out the value of your defined contribution pension schemes, including SIPP pensions.

For defined benefits schemes where you have an agreed income based on your salary, you calculate the value of your pension by multiplying your expected pension by 20. You also need to add on any lump sum received and any separate defined contribution pension pots.

For example, Sean has a local government-defined benefit pension of £20,000, a tax-free lump sum of £30,000 and a separate SIPP pension pot of £100,000. Multiply the defined benefit pension by 20, and then add the lump sum and SIPP amounts to that and his total pension value is £530,000.

Is it worth exceeding the lifetime allowance?

There are some circumstances where it may be worth exceeding the lifetime allowance. However, UK tax law is complicated and you should speak to an independent financial adviser or a solicitor for advice based on your situation.

You may decide to breach the lifetime allowance if the following apply:

  • You contribute to a workplace pension with an employer-matched contribution. Although you will pay a 25% lifetime allowance tax charge, this may be outweighed by your employer’s contributions.
  • You pay into a pension to avoid a future inheritance tax bill. Pensions often fall outside your taxable estate and don’t incur an inheritance tax charge. (Seek out professional advice as the rules are complex).
  • You are part of a defined benefit pension scheme. These pensions are valuable and the income you receive from them may be worth more than the tax charges.

How do I protect or increase my SIPP lifetime allowance?

The lifetime allowance was £1.25 million in the 2015–2016 tax year and it has been reduced since then. However, it may be possible to protect and increase your lifetime allowance using the following methods:

  • Individual protection 2016. You may be able to apply for this protection if your total pension wealth was more than £1 million on 5 April 2016. Your personal lifetime allowance will increase to the value of your pensions on 5 April 2016 or £1.25 million, whichever is lowest. You can keep on building up your pension, but must pay tax on pension withdrawals over your protected lifetime allowance.
  • Fixed protection 2016. This fixes your lifetime allowance at £1.25 million, but you’re no longer allowed to contribute to your pension. If you put money into a pension once you have fixed protection, you’ll lose it and will have to pay a tax charge on the excess

If you are considering applying to protect your lifetime allowance, then speak to an independent financial adviser to make sure you choose the most suitable option for your circumstances.

Can I avoid reaching the SIPP lifetime allowance?

Speak to a financial adviser if you think you might breach the lifetime allowance. They will be able to assess your circumstances and advise you on the best course of action. If you have a generous defined benefit pension, you may still decide to keep paying in and breach the lifetime allowance.

Here are some possible ways to avoid breaching the lifetime allowance:

  • Use an ISA rather than a pension to build your wealth. You can currently contribute £20,000 per year into an ISA.
  • Increase contributions to your spouse’s pension as they have a separate lifetime allowance.
  • Consider retiring early. Most defined benefit pension providers offer a lower level of income if you retire early.
  • Look into a phased retirement. This may benefit you if the lifetime allowance increases in the future. However, this is not guaranteed.
  • Withdraw tax-free cash as soon as possible. This reduces the remaining pension balance, minimizing a potential lifetime allowance charge at age 75.

What do I need to know when planning my pension?

Zoe Stabler

Finder expert Zoe Stabler answers

If you’re lucky enough to have saved a decent pension pot worth around £1 million, you should start doing some pension planning. You may get hit with some hefty tax charges if you sit back and do nothing.

Even if you have a smaller pot, it makes sense to understand the lifetime allowance rules. A smaller pot worth £700,000 could breach the lifetime allowance if there’s a bull market and your pot grows by 10% for 5 years.

Get financial advice to work out the best options for you. You may decide to stop paying into your pension and focus your future savings in stock and shares ISAs or buy investment properties instead.

Bottom line

Even if your pension wealth isn’t getting close to £1 million, it’s still worth getting your head around the lifetime allowance rules. You may need to do some pension planning in the future once you do have a bigger pension pot.

If your pension wealth is getting close to £1 million, contact an independent financial adviser to discuss your pension planning and retirement options. They will be able to advise on whether you’re likely to breach the lifetime allowance, how you can avoid it and how to minimize your tax bill. It could save you some serious money in the long run.

Frequently asked questions

Finder survey: Do you have any type of pension?

Response
Yes72.29%
No27.71%
Source: Finder survey by Censuswide of Brits, December 2023
Pensions are long-term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply. Keep in mind that the tax treatment of your pension and investments will depend on your individual circumstances and may change in the future. Capital at risk.
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Alice Guy is a Suffolk-based finance writer, a busy mum of 4 older kids and a self-confessed personal finance geek. She trained as a chartered accountant with KPMG London before working for Tesco Plc as a business analyst. She loves to write about budgeting, saving, investing and building wealth. See full bio

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