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Lifetime allowance

The Lifetime Allowance is a limit on the amount of pension benefit (cash lump sum or income) that can be taken from a pension plan without triggering an extra tax charge.

The lifetime allowance was introduced at a level of £1.5 m in 2006. It then increased each year to 2010 up to a level of £1.8 m. Since 2010, then a number of pension reforms has resulted in the lifetime allowance being reduced and the current level in the 2016-17 tax year is £1m.

When benefits are taken, or the plan holder dies, a calculation known as a benefit crystallisation event (BCE) takes place. The amount of cash and income taken is tested against the lifetime allowance. If the amount taken is less than the lifetime allowance nothing happens but if the amount is above the lifetime allowance, additional tax is payable.

If there is money invested in a pension pot (including drawdown) at age 75, another benefit crystallisation event takes place.

Annual allowance and Money Purchase Annual Allowance (MPAA)

The annual allowance is a limit to the total amount of contributions that can be paid to defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit pension scheme each year, for tax relief purposes.

Normally by the time someone converts their pension pot into drawdown they will have stopped paying money into a pension pot but if they are still paying money into a pension plan, or a member of a final salary pension it is necessary to check if the money being paid in is with the allowance for tax relief.

The annual allowance is currently capped at £40,000 per annum. However, if income is taken from a flexi drawdown plan or the upper income limit is exceeded with capped drawdown the Money Purchase Annual Allowance (MPAA) applies and the annual allowance is reduced to £4,000.

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