Retirement planning is very much in the news just now as many of those that have seen their finances come under pressure due to the pandemic, and now the energy crisis, have struggled to maintain contributions.

One of the most popular long-term savings vehicles in the UK is the pension, which is a tax-efficient wrapper that allows you invest for your future whilst paying less tax.

The tax benefits are designed to encourage us to save enough to fund our own retirements, rather than depend on the state in our old age. However, these benefits have become steadily less generous over the last 20 years.

Governments have avoided directly cutting tax relief on pension contributions because they fear it would be too politically controversial; instead they have drastically cut the amount you can save into a pension and in this context, if you have been saving into your pension for some time now you may have heard the term ‘lifetime allowance’.

What that means in practice is that as well as limiting the amount you can save into your pension each year, there is a lifetime allowance on the total amount you can shelter; currently, this lifetime allowance is just over a million pounds.

If the total amount of money in your pension exceeds that – even because of strong investment performance rather than your contributions – will have to pay a punitive rate of tax on the excess when you come to take it.

Whilst there is no question, a million pounds is a lot of money, but if you are hoping to fund thirty years in retirement with even a modest standard of living, it might not be as much as you think.

Currently, one million pounds would buy a 65-year old single man an inflation-linked annuity delivering income of around £30,000 a year for life; that’s enough to be comfortable, but it’s not as rich as Croesus.

The lifetime allowance was introduced at £1.5m in 2006, and rose as far as £1.8m in 2011, but since then it has mostly gone down; it was cut to £1 million in 2016 and now stands at just over one million and seventy thousand pounds, so there is no guarantee whatsoever that it will rise with inflation in the future.

If you are in your 40s or 50s, it’s worth planning ahead now (Investing Basics: Investing in your 40s and 50s); if you are closer to retirement and are concerned that you may breach the lifetime allowance, it’s worth seeking advice.

The rules are more lenient for people with defined benefit pensions; learn more about that and about efficient pension investing here.

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