Finance Act 2004 introduced a cap on the benefits an individual can accumulate in a registered pension scheme, (the lifetime allowance). If an individual’s fund exceeds the lifetime allowance an additional tax charge is levied when benefits are drawn out of the fund.
At present there is a lifetime limit on the value of pension funds held by any individual of £1.25m
In the Budget Speech, the Chancellor announced that the lifetime allowance will be reduced to £1m with effect from 6 April 2016, and will then be indexed by reference to CPI from 6 April 2018 onwards.
Transitional protection for pension rights over £1m will be introduced alongside the reduction in lifetime allowance to ensure the change is not retroactive.
The additional tax charges that arise where the lifetime allowance is exceeded serve to discourage individuals from making excessive pension contributions and thereby restrict the amount of tax relief claimed by these individuals.
While no changes were announced to the annual contribution limits, this reduction of the lifetime allowance will further restrict the scope for individuals to claim tax relief for contributions to pension schemes.