£1m sounds like a lot of money and it is a lot of money, but for many pension savers it's a limit which results in large tax charges being paid.
The lifetime allowance is a tax charge on larger pension pots or entitlements to final salary pension income.
It's been gradually reduced from its original level of £1.8m, now standing at £1m, although some pension savers have protected lifetime allowances at previous levels.
If your pensions are tested against the lifetime allowance, the excess amount can be taxed at 55% (if taken as a lump sum) or 25% (if taken as income), with income tax applied to any income taken after the lifetime allowance charge.
Pensions are already subject to an annual allowance of £40,000, £10,000 or £4,000 depending on your income and whether you have taken a flexible income from your pension.
This means pension savers are subject to limits on how much they can save as well as how much they have saved, which takes into account investment growth too.
For savers with larger pension pots or larger defined benefit pension entitlements, it's important to seek professional independent financial advice to ensure you are structuring benefits in the most efficient way.
“Not only are pension contributions restricted on an annual basis but the total value is ‘tested’, often more than once, against this £1m lifetime limit. The lifetime allowance test is more than just a tax for those who save too much – it also penalises investment growth.”