When do clients need to start worrying about the pension lifetime allowance?

The LTA, which governs how much can be saved into a pension before tax charges apply, will remain at £1.073m until 2025/26.

While people may think this is a substantial pot, as pensions benefit from investment growth and compound interest, Quilter is warning a pension of £500,000 has the possibility of falling foul of the tax charge.

If the LTA is frozen until tax year 2026/27 and then increases by CPI thereafter, which the OBR assumes is 2% pa, then what level does a pension need to be at today to hit the charge?

If the LTA is frozen permanently those figures drop to:

Both tables assume 5% growth per annum net of charges.

Ian Browne, retirement planning expert at Quilter, commented: “While a £1m in your pension pot sounds like a very large pot of money to many clients, advisers know that thanks to investment and compound interest that number can be easier to hit than people may think.

“Our calculations show that someone with a £500k or £600k pension pot and are 15 years from retirement will be forced to hand over some of their hard-earned cash to the taxman. This is assuming 5% net investment growth and doesn’t take into account any personal or employer contributions which will substantially speed up growth.

“Reviewing clients pension funds in light of the Chancellor’s decision to freeze the Lifetime Allowance can make a real difference to a client’s financial plan.”