ACCA Taxation (F6) Practice Exam

What does the lifetime allowance limit refer to?

1. The maximum annual contribution

2. The total amount accumulatable tax-free in a pension fund

3. The minimum retirement age

4. The cap on employer contributions

The correct answer is: The total amount accumulatable tax-free in a pension fund

The lifetime allowance limit specifically refers to the total amount that an individual can accumulate in their pension pot without incurring additional tax charges when they access their pension benefits. This limit is designed to ensure that tax relief is provided only up to a certain level, beyond which any excess funds may be subject to tax upon withdrawal. In the context of pensions, this allowance is pertinent because it incentivizes individuals to save for retirement, while also preventing excessively large pension pots that might reduce the overall tax revenue for the government. If a person’s pension savings exceed this limit, there would typically be tax penalties applied to the excess amount when they draw on their pension, which underscores the importance of being aware of the lifetime allowance. The other choices do not accurately capture the definition of the lifetime allowance limit. For example, the maximum annual contribution refers to how much one can contribute to a pension scheme each year, while the minimum retirement age pertains to the earliest age at which an individual can start taking pension benefits. The cap on employer contributions focuses on the restrictions regarding how much an employer can contribute into an employee's pension fund, rather than the total tax-free amount accumulated.