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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Our expert explains that the limits apply to the amount amassed in a pension not just contributions
Thursday 21 Oct 2021 Author: Tom Selby

Mr A (aged 50) starts a SIPP with £10,000 and does not make any further annual contributions over the next 10 years into the SIPP or any other pension, and the value of the that £10,000 grows to, say, £1 million, how would the £1 million pension fund be assessed against the lifetime allowance?

Would Mr A have only used £10,000 of his UK lifetime allowance even though that £10,000 has grown to £1 million? And for the 10 years Mr A did not make any annual contributions how can he, if possible, make up the contributions that he would have been allowed annually?

Mr Gill

Tom Selby, AJ Bell Senior Analyst says:

The UK lifetime allowance is currently set at just over £1 million (£1,073,100 to be exact). Chancellor Rishi Sunak announced in his March 2021 Budget the allowance would be frozen at £1,073,100 for the remainder of this Parliament until 2025/26.

You use up a portion of your available lifetime allowance each time a ‘benefit crystallisation event’ takes place. These events include taking your pension tax-free cash and choosing a retirement income route (such as drawdown or buying an annuity). 

The scheme administrator will test how much is held in your pension pot when a benefit crystallisation event occurs, rather than how much has been contributed. In other words, the test covers both how much is paid in and any investment growth the fund enjoys.

So, to use your example, if someone contributes £10,000 into a pension, the fund grows to £1 million and then they choose to take their 25% tax-free cash and invest the remaining 75% in drawdown, two benefit crystallisation events will occur:

– Taking 25% tax-free cash (£250,000);

– Investing the remaining £750,000 in drawdown.

Based on the current lifetime allowance of £1,073,100, these two benefit crystallisation events will therefore use 93.19% of their available lifetime allowance.

The pensions annual allowance, which sets the amount you can save in a pension each year, is £40,000. If you haven’t made the most of all your annual allowances in recent years, it is possible to ‘carry forward’ unused allowances – although only from the previous three tax years.

This means that, when used to its maximum, and based on certain qualifications, in 2021/22 you could boost your annual allowance to £160,000 (using first your £40,000 annual allowance for 2021/22, plus three times £40,000 annual allowances from the three previous tax years).


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Please note, we only provide information and we do not
provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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