Are you aware about your lifetime allowance? If not, you must get all the details surrounding this subject.

Generally, the limit on the value of payouts that can be drawn from your pension schemes in the form of lump sums or retirement income and can be paid without generating an extra tax charge is called lifetime allowance.

This type of allowance was first introduced in 2006 at a level of £1.5 million. Since 2010, there have been a number of reforms that led to such allowance being reduced. Now, the current lifetime allowance for the tax year 2015-16 is £1.25 million, which is set to reduce further to £1 million from 6 April 2016.

Due to the pension reforms in the subsequent years, those with benefits valued in excess of the lifetime allowance can apply for ‘protection’ from tax charges. Protections like primary protection, enhanced protection, and fixed protection are available.

If your total pension savings exceed £1.25 million, Individual Protection 2014 is available for you. With Fixed Protection, the protection is lost if you build up any new pension savings.

In case if the cumulative value of the payouts from your pension pots including benefit schemes exceeds the lifetime allowance, lifetime allowance charge will be charged to you. However, the way such charge applies depends on how you receive your money which can be either from your pension as a lump sum or from your regular retirement income.

If you take any amount over your lifetime allowance as a lump sum, it is taxed at 55%. Likewise, if you any amount over your lifetime allowance as a regular retirement income, you will be charged at 25%.

If you die before taking any benefits, your benefits will be tested against the lifetime allowance. A lifetime allowance test will be tested on your remaining benefits if you fail to take all of your benefits by age 75.

If you are seeking more insights on this issue, you can speak to professional financial advisers and decide on how to deal with such type of allowance.