£700,000 in your pension? You could be taxed at 55%

If your pension pot is becoming a sizeable asset, it might not be long until you could be taxed at a painstaking 55%. The lifetime allowance or ‘LTA’ is essentially a cap on the size of your pension. The current limit is £1,073,100. Go over this and your money could suffer significant tax penalties. This amount includes any contributions you make to your pension, as well as the growth of your fund, and is applied across both defined benefit schemes and more typical defined contribution pensions.

Fortunately, the tax penalties will only apply when you come to take the money out, however, they are pretty steep. This complicates further at age 75 but that’s for another article.

What are the lifetime allowance tax charges?

If you take any income over the LTA as a lump sum, it will be taxed at an eye-watering 55%. If, instead, you take it as a regular income that could soften the blow slightly as it will be taxed at 25%. Although, that will be on top of your marginal rate so it’s still a minimum of 45% and could even cost you 65% if you’re a higher rate taxpayer. Ouch!

How could this impact me?

I can already hear you thinking “I don’t need to worry about that? A million pounds is a long way off!” Well, maybe it’s time to re-consider…

If you have £700,000 in your pension and it grew at around 5% a year, even if you completely stopped contributing, your pot would be over the million-pound mark in just over seven years – not that long at all. If you were also contributing £1,000 a month, you’ll have in excess of a million pounds in just six years – the lifetime allowance can creep up on you pretty quickly.