What is the pension lifetime allowance 2021/2022?
THE pension lifetime allowance had been expected to rise in line with inflation, but instead has been frozen at its current level  at 1,073,100  for 2021-22. Chancellor Rishi Sunak made the call in April's Budget and it is among a string of measures aimed at plugging the Covid blackhole in the country's finances. 1 The pension lifetime allowance is a cap on how much you can save into a pension fund for retirement Credit: Getty  The freeze is planned to last for five years in total and is essentially a pay cut once you take into account inflation. Here, we explain everything you need to know about the pension lifetime allowance, from what it is to how it will affect you. The lifetime allowance is the total amount you can save tax into a pension scheme. In other words, its the maximum amount you can save into all of your pensions combined without incurring a potentially hefty tax charge. This includes personal, workplace and defined benefit schemes, but excludes your state pension. The lifetime allowance is one of two which set how much you can pay into your pension before getting penalised with tax. WE round-up the main types of pension and how they differ: Personal pension or self-invested personal pension (Sipp) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest. - This is probably the most flexible type of pension as you can choose your own provider and how much you invest. Workplace pension - The Government has made it so it's compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out. These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% (1% in tax relief) and employers contributing 3%. - The Government has made it so it's compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out. These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% (1% in tax relief) and employers contributing 3%. Final salary pension - This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year on retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore. - This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year on retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore. New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is 179.60 a week and you'll need 35 years of national insurance contributions to get this. You also need at least ten years' worth of national insurance contributions to qualify. - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is 179.60 a week and you'll need 35 years of national insurance contributions to get this. You also need at least ten years' worth of national insurance contributions to qualify. Basic state pension - If you reached the state pension age on or before April 2016, you'll get the basic state pension. The full amount is 137.65 per week and you'll need 30 years of national insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up national insurance contributions under both the basic and new state pensions will get a combination of both schemes. The other is the annual allowance and caps the amount you can save into your private pension scheme in a tax year. This is currently set at 40,000 per year, and has also been frozen. When the lifetime allowance was introduced back in 2006, it stood at 1.5million. In 2010-11, it went up to 1.8million. Since then it has been cut, frozen, and increased in line with inflation. It is now frozen again until at least April 2026. The five-year freeze is one of a host of measures to help pay the Treasurys Covid-19 support bills. By freezing the pension lifetime allowance, the Chancellor has effectively lowered the amount you can put into your pension to avoid an extra tax on withdrawal. This has been dubbed a raid on taxpayers.  Should inflation begin to rise, the impact will be even greater, as these allowances become even more stingy in real terms. While a figure of over 1million may sound like a big sum, over a retirement of 30 years or more, it wont pay very generously. For example, the reality is, for someone aged 65, it will only buy an income of around 26,100 a year at age 65 (increasing in line with inflation before tax). After basic-rate tax, this equates to a monthly income of 1,950, according to investment firm, Aegon  hardly the income of the super-rich. The freezing of the lifetime allowance is not something that only wealthy people need to worry about, as lots of ordinary savers will feel the impact too. Here are some tips from financial provider Aviva on how to get going. Understand where you start: Before you consider your plans for tomorrow, you'll need to understand where you stand today. Look into your current pension savings and research when youll be eligible for the state pension, and how much support youll receive. Before you consider your plans for tomorrow, you'll need to understand where you stand today. Look into your current pension savings and research when youll be eligible for the state pension, and how much support youll receive. Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too. All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too. Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you're saving. Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you're saving. Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement. Lots of those affected will be individuals who have "done the right thing" and been diligent about saving regularly over the years  or who have benefited from good investment growth in their defined contribution pension. Freezing the allowance will harm public sector workers such as doctors or senior teachers. And, if the allowance remains at its current level, more and more people could find themselves dragged into having to pay the tax as their salary increases. Check out the annual statements from your pension provider setting out what they expect will happen to your pension. These can help you work out whether you are likely to exceed the allowance. If you do go above the allowance, youll get a statement detailing how much tax you owe. The tax will be deducted before you start getting your pension. The way the tax applies depends on how you receive the money from your pension. Any amount over the 1,073,100 cap that you take as a lump sum is charged at 55%. Any amount you take as a regular retirement income, such as purchasing an annuity or taking a regular income through a drawdown plan where the pot remains invested, attracts a charge of 25%. If you are on your way to exceeding the lifetime limit, you need to think twice before moving more money to your pension. As a pension saver, you are able to apply for protection that saves you from the tax. But this means you have to stop putting any more money aside immediately. Find out more at Gov.uk. Another option involves using tax-free savings such as ISAs (individual savings accounts) as well as pensions for retirement saving. Most read in Money IN FOR A PENNY Rare 20p error coin sells for 57 on eBay - how to spot one in your change IN CREDIT How to claim one-off Universal Credit payment worth up to 812 to help pay bills BIT-CONNED Retiree scammed out of 120k in Instagram Bitcoin con - how to spot fake adverts JOBS BLOW Thousands of jobs at risk as lockdown extended beyond July furlough deadline KONICHI-WOW Unassuming house hides a stunning secret that took TEN YEARS to complete  In some very specific cases, there may be an argument for breaching the limit, but as the calculations can be complicated, its worth seeking independent advice. The same applies if you are concerned in any way about the freezing of the pension lifetime allowance  and how it could impact you. If in doubt, seek advice to avoid any costly mistakes.