How does the pension lifetime limit work?

Jon211

I'm mid 30s at the moment and have nowhere near the lifetime limit in my pension right now.
However, given that it's come down from £1.8m a few years ago to £1.25m now and I can see it either coming down further, or at the very least not keeping up with inflation, it's something that could concern me in 30 years if I aggressively contribute to my pension.

I've had a search online, but it all seems to be confusingly worded.

From here: https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance

It says that:

You usually pay tax on any private pension savings above the lifetime allowance - this is currently £1.25 million.

What exactly does 'pension savings' mean in this context?
If we imagine someone has exactly £1.25m in their pension pot.
Do they pay tax when putting more money in? If so, how exactly does that work? Is it just that the regular tax relief doesn't apply?

Additionally, how does it work with the new rules about taking money out from age 55.
Let's say you have £1.2m in a pension at age 55, then presumably taking a small sum out each year could mean you stay under that £1.25m limit. Do they add up what's been taken out and what the current value of the pension is to determine if it's over the lifetime limit?

Triumph13

You pay the tax, and are measured against the lifetime allowance, when you crystallise the pension. Each time you crystallise a pension it gets measured against the then lifetime allowance to give a percentage used up so if the allowance is £1.25M and you crystallise £500k (take your TFLS and put the rest into drawdown / buy an annuity) then that's 40% of your LTA gone. If it then drops to £1m and you crystallise £400 k that's another 40% gone and so on.


As to what the LTA will be by the time you retire, that's anyone's guess - but if I was to wager a shilling or two I'd put it on the LTA no longer existing as the steady reduction of the annual allowance fulfils the same role.

Jon211

Thanks, that mostly clarifies things for me.
Having the LTA disappear entirely would certainly suit me.
I've done fairly well financially the last couple of years and have topped up my pension by a significant amount - if I'm able to continue doing this then I can see that I might get stung by it by the time I reach retirement age, though as you say they may just continue reducing the annual allowance.

I'm still a bit confused about some things in the link I posted above though.

You’ll get a statement from your pension provider telling you how much tax you owe if you go above your lifetime allowance. Your pension provider will deduct the tax before you start getting your pension.

This bit suggests that you will have tax deducted before you've crystallised anything if you go over the allowance?

Triumph13

They take the tax AS you crystallise. If you had a £100k uncrystallised fund and had already used up all your LTA then they pay the tax to HMRC and the balance goes into payment.

Jon211

OK, cool.
It all makes sense now