Pension lifetime allowance , tax relief and tax

[jonny70]

Im in my mid 20's so the lifetime allowance doesn't apply to me yet.


Am I correct in saying that a 40% tax payer gets pension relief on contributions so 6k became 10k .So one can contribute 40k a year to their pension ? (really 24k of taxed income if claiming relief)

Whats the lifetime allowance ? Im a little confused .Does it mean I can get tax relief on contributions to my pension up to 1 million? Then whats does it mean there is a tax charge of 55% once you go over the lifetime allowance?

[jonny70]

Claudia Skies said:

jonny70 said:

Then whats does it mean there is a tax charge of 55% once you go over the lifetime allowance?

If your investments grow beyond £1m nothing happens for the time being. When you go to draw your pension the pension company has to check your figures (all of your pensions) against the lifetime allowance. As soon as they see you are over the £1m they are obliged to pay any excess to you net of 55% tax. They send the tax directly to HMRC a bit like PAYE.

In practical terms many people will find themselves at, say, age 50+ and getting close to reaching that £1m figure by the time they retire. This means there's scope to reduce the amount of "investment risk" in the portfolio. Like any sort of insurance, reducing investment risk usually has a cost attached to it in the form of lower returns. If this is juggled carefully it means, if you like, that you can arrange for HMRC to pay 55% of the cost of your "insurance".

Like so many things in investment it's all a question of juggling risks and returns.

So one gets relief on contributions to 1 million quid ?

Once your pot is over a million (assuming growth,dividends' etc ) you then pay 55% tax ? so if your pot is 2 million when you go to retire . So on your pot up to 1 million you pay your regular income tax on what you withdrawn (and 25% lump sum can be withdrawn tax free) ,On the 1 million to 2 million you pay 55% tax on lump sum and any income /withdrawals you pay 25% tax + income tax ?

Edited by jonny70 on Wednesday 25th March 15:18