Thinking of life after retirement should be an exciting time.
But knowing what to do with your pension savings, as well as navigating the various rules and regulations that come into play regarding your hard-earned funds, can be confusing – especially if you have started your new chapter abroad.
When it comes to your retirement fund, a key factor that’ll impact your savings is the Lifetime Pension Allowance (LTA).
In this guide, we’ll cover what exactly the lifetime pension allowance is, the charges it brings, and how expats can protect themselves against paying more than they have to – or even mitigate the Lifetime Allowance Tax Charge completely.
For those living abroad, you could potentially increase the value of an existing pension fund, without finding yourself subject to additional tax charges.
So, let’s get into it.
What is the Lifetime Pension Allowance?
Your lifetime pension allowance is the maximum amount that you can save in your UK pension before facing an extra tax charge. In other words, there is a limit on the total of tax-relieved monies you can have accumulating in your pot over time.
Now this limit is important, and potentially costly if you run over.
If your total pension benefits are taken above the lifetime allowance, you could face a hefty tax charge of 25% or even 55% on higher pension amounts – without immediately realising it.
As such, it’s an effective way for HMRC to continually generate tax revenue, as all UK-based pensions come within its reach.
Although there have been protections introduced for the lifetime pension allowance – which we’ll discuss in detail below – it is still important to be vigilant when it comes to keeping your pension savings in top form for your retirement.
We know the importance of making informed choices when it comes to your retirement income, which is why we go the extra mile to ensure your pension pot is working for you now and in the future.
For stand-out service and advice with zero hidden fees, get in touch with the Brite Advisors team today.
What is the lifetime allowance limit for pensions - and how does it apply to me?
For most people, the standard lifetime pension allowance is £1,073,100 as of the tax year 2021/22.
This amount has been frozen as far as 2025/2026, so anyone thinking of retirement within the next few years should not expect any further fluctuations.
If you have multiple pension pots accrued through various providers or personal pensions, then the lifetime allowance charge applies to the total accrued amount in all pension schemes.
This includes any defined benefit schemes or savings collated from defined contribution pensions.
Although there is no set limit on how much you can accrue in total pension benefits, HMRC do carry out checks at determined times to see if you have excess benefits which may go over the lifetime allowance.
When is my pension income checked?
At the time of writing, if you have the relevant benefit accrual then there’s no need to worry about penalisations.
However, if your private pension exceeds the lifetime allowance threshold, then you could be subject to excess tax charges.
As such, keep in mind the following events or circumstances, as these are when HMRC typically carries out their checks:
- If you die before age 75 and have pensions that haven’t been used.
- When you reach age 75 and have untouched pensions or, alternatively, take a pension in drawdown – this is when you leave your money invested by taking a regular pension income from the fund (rather than using the total value to purchase an annuity).
- When you take a lump sum or income from a defined contribution pension – similar to a drawdown, these two checks will automatically result in a 25% tax charge.
- When you begin to draw from a defined benefit pension.
- If you transfer a pension overseas before age 75.
After you reach the age of 75, there are usually no more checks against the lifetime allowance.
I've retired abroad - how could I mitigate additional charges?
If you’re enjoying your retirement abroad, you can transfer your existing pension from a UK registered scheme to a QROPS (a qualifying recognised overseas pension scheme).
Transferring to a QROPS is one of the ways you could reduce these charges – but it’s crucial that you do this before you breach the allowance limit.
The act of moving your pension arrangements to a QROPS will alert HMRC and prompt them to test the value, but the overall move is classified as a ‘Benefit Crystallisation Event’.
You ‘crystallise’ your benefits when removing income from your overall pension amount or plan on taking out a pension commencement lump sum, but it’s important to note that any value above the lifetime allowance threshold could still receive a 25% charge.
This threshold has seen some movement over the past ten years or so, falling from £1.8 million in the tax year 2010/11 before being lowered to £1.5m, £1.25m and finally reduced to £1m as of April 2016.
When it comes to keeping your money clear from the £1m 2016 reduction, we’ll explore the two forms of protections for your pension fund further on in this guide.
What are the benefits of using a QROPS?
If you have a large pension pot and are looking to conserve as much of that value as possible, transferring to a QROPS is one of the ways you can avoid lifetime allowance tax charges on this amount.
This is if your outstanding investment funds are under the current allowance limit of £1,073,100, which is the established threshold as of the 2020/21 tax year.
This means that retirees who are enjoying themselves overseas could save tax in the long run by transferring their pension pot into a QROPS, prompting benefit crystallisation events.
In all, you can potentially expect that there will be less chance of being caught out by a lifetime allowance tax charge, especially on the future value of a pension fund.
This applies whenever untouched funds are drawn upon.
The value of your existing pots will be registered with HMRC and will not increase unless you decide to move back to the UK and take up residential status once more, continuing to make contributions to a UK pension.
As such, you could also see an increase in the total pension commencement lump sum amount available to you, as it is tax-free from any future crystallisation.
Essentially, if you want to keep your savings safe from the reduced lifetime allowance threshold in 2016 – or if your existing pension accumulation is dangerously close to the limit – a QROPS transfer could be beneficial.
Aside from possible LTA benefits, a QROPS offers expats plenty of other practical reasons to use it: estate-planning flexibility, easy currency access and tax efficiency are just a few examples.
It’s easier for expats to keep an eye on a pension when it is kept in the country where they live, giving you easy access at any time. It is also simpler to track law and regulation changes in the same jurisdiction, as well as dispensing a pension in the same currency.
This means that you could potentially avoid further fluctuations in exchange rates.
How do I get a QROPS to assist with my Lifetime Pension Allowance?
If you believe an overseas transfer to a QROPS would work well for your long-term goals and retirement abroad, we can create a bespoke pension arrangement for you.
Brite Advisor’s industry-leading team can source the best solutions for you, your money and your peace of mind, working alongside fantastic scheme administrators and a cutting-edge Brite Platform that makes investing easy.
Want to get the most out of your next chapter? Get in touch with the Brite team for a simple, straightforward chat with one of our friendly advisors.
What do I need to remember when applying for a QROPS?
If you are currently residing abroad in Europe, it is crucial that your QROPS is regulated within the EEA (European Economic Area) – or you could still get stuck paying 25% thanks to the UK’s ‘overseas transfer charge’.
For those retiring in other areas, such as Australia, your transfer could still be liable for this charge unless your chosen QROPS is situated in the place where you reside.
How to protect your lifetime allowance:
Individual Protection 2016 vs Fixed Protection 2016
To avoid being snagged by lifetime allowance tax rules, two kinds of protection are available through the UK government.
Tax is still made payable at 55% for lump sum values and 25% for benefits drawn as part of a regular income stream, but there are ways to mitigate this by applying for one of the following:
- Individual Protection 2016
- Fixed Protection 2016
The main difference between the two is that, with Individual Protection, the individual can still be an active member of a pension scheme, whereas Fixed Protection requires contributions to have stopped (or benefits accrued) as from 6 April 2016.
So it goes, Individual Protection guards your lifetime pension allowance “to the lower of £1.25 million and the value of your pension savings at 5th April 2016”.
If you choose to continue building up your pension, you’ll still pay tax on money deducted from your pot that exceeds your protected lifetime allowance.
Fixed Protection simply fixes your LTA value at £1.25 million.
You cannot continue to pay into your fund, as you’ll lose this level of protection and will pay tax on the value of savings taken from the usual LTA should you continue to take benefits.
How do I apply for lifetime pension allowance protection?
To arrange for Lifetime Pension Allowance Protection, you’ll have to use the government’s dedicated portal.
It is important to note that each type of protection has different qualifying criteria, so make sure to check that you are eligible by using the following guidelines.
Individual Protection 2016
For Individual Protection, you are able to apply if your pension pot was worth more than £1 million as of the 5th of April 2016. Unlike Fixed Protection, you can put your pension forward if you have previously enjoyed or still have protections in place, such as:
- Enhanced Protection
- Fixed Protection
- Fixed Protection 2014
- Fixed Protection 2016
However, Individual Protection 2014 and primary protection are exempt – with Individual Protection 2016 continuing to stay dormant until you stop or lose previous plans. In this case, HMRC must be notified in writing.
Fixed Protection 2016
To benefit from Fixed Protection, you are able to apply if yourself or your employer has not added to your pension scheme since the 5th April 2016, or if you chose to withdraw from any workplace schemes by this date.
However, you cannot apply if you have the following:
- Enhanced Protection
- Primary Protection
- Fixed Protection
- Fixed Protection 2014
Similarly to Individual Protection 2016, you can still apply for Fixed Protection 2016 if you have the former.
Using Brite Advisors to help you get the most out of your pension
Our knowledgeable team knows how important pensions are when it comes to your retirement and getting the most out of your life’s earnings.
That’s why we offer our clients a truly unbeatable all-in-one pension solution service that bridges advisory and pension administration, trusted asset handling and easy, secure transfers that span the globe.
First started in 2016, we facilitate top-level solutions at a reduced cost, giving you unbeatable options that won’t break the bank.
We do all of this without meddlesome middlemen and interfering third-parties trying to upsell – giving you straightforward advice that is truly in your best interests.
Whether you have just started thinking about your pension or have already moved abroad and are displeased with the state of your current solution, we can help you get everything working smartly and smoothly.
At Brite Advisors, we have assisted thousands of people with complete pension administration services and asset management options, in line with UK best practices.
All of our professional financial advice comes from years of experience within the field, giving individual planning solutions that can nurture investment growth for those all-important retirement dreams.
To see how we could help, get in touch using our handy contact form. Or you can easily book in a callback at a time that suits you.
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