Lifetime allowance all you need to know

Published  06 April 2023
   10 min read

Before 6 April 2023, the lifetime allowance was the maximum amount of pension savings an individual can build up without a charge being applied when they take their benefits.

Key facts

  • The lifetime allowance charge has been removed from 6 April 2023 and the lifetime allowance will be completely removed from 6 April 2024.
  • During the 2023/24 tax year benefits will still be tested against the lifetime allowance.
  • Excess benefits taken as a lump sum will be taxed at the recipient's margin rate of income tax.
  • Before 6 April 2023, the lifetime allowance was the maximum value of benefits that can be taken from a registered pension scheme without being subject to the lifetime allowance charge.
  • Benefits are tested against the lifetime allowance when a benefit crystallisation event happens.
  • It was possible to protect benefits in excess of the lifetime allowance.
  • The lifetime allowance limit remains and is currently £1,073,100.

In the Spring 2023 Budget, it was announced that whilst the lifetime allowance charge was removed on 6 April 2023, the lifetime allowance will remain in place until April 2024. During the 2023/24 tax year, benefit crystallisation events will still happen. But where benefits exceed the lifetime allowance, there's no lifetime allowance charge applied to those benefits. Where previously the excess benefits had a 55% charge deducted, the excess will be subject to income tax at the recipient’s marginal rate.

The rest of this article explains how the lifetime allowance operated prior to 6 April 2023.

When does it apply?

A test against the lifetime allowance is done when there’s a benefit crystallisation event. The lifetime allowance charge has been removed from 6 April 2023. There are several benefit crystallisation events (opens in new window), the most common of which are:

  • Taking benefits.
  • Dying.
  • Transferring to a QROPS.
  • Reaching age 75.


A lifetime allowance charge only applied when the value of an individual's pension savings at a benefit crystallisation event was over the lifetime allowance. So, if they had pension savings of £2,000,000, there was no charge at that point. But if they crystallise all of their pension savings, there would have been a lifetime allowance charge on the excess of £926,900 (£2,000,000 - £1,073,100). From 6 April 2023 the excess benefits will only be liable to income tax at the recipient’s marginal rate when they are paid out.

The crystallised value for a defined contribution scheme is the amount of the fund taken. For a defined benefit scheme, it’s 20 x the pension taken plus the tax-free cash. 

Is there a charge?

As announced in the 2023 Spring Budget the lifetime allowance charge has been removed from 6 April 2023.  With the lifetime allowance being completely removed from 6 April 2024.  During the 2023/24 any benefits in excess of the lifetime allowance with be liable to income tax at the recipient’s marginal rate at the point the benefits are paid.

For the avoidance of doubt the excess benefits will be liable to income tax whether they are paid as a lump sum or as an income.

Before 6 April 2023, if an individual crystallises benefits above the lifetime allowance, there was a lifetime allowance charge.  It can therefore be seen as a tax on pension savings growth; growth resulting from contributions and growth on investment returns.

How much was the lifetime allowance charge?

It depended on how the individual took their benefits. Any excess over the lifetime allowance taken as a lump sum (a lifetime allowance excess lump sum) and the charge was 55%.

Alternatively, the excess could have been used to provide an income, by either a pension annuity or income drawdown. The charge was then 25% but any pension instalments or withdrawals made were taxed at the individual’s marginal rate of income tax. If the individual paid income tax at 40%, the tax ‘take’ was similar to taking the benefits as a lump sum. If the individual paid income tax at 20% the tax take is less.

When an individual took benefits or reached age 75, both the individual and the scheme administrator were jointly liable for paying the charge. Normally the scheme administrator deducted the charge from the pension fund and paid it to HMRC.

How did the lifetime allowance charge work?

Not everyone takes all their benefits at the same time. An individual could have several pension plans and crystallise them at different times or a defined contribution plan could be crystallised in stages.

Each benefit crystallisation event uses up a proportion of the lifetime allowance that applies at the time.

Every time an individual crystallises pension savings, they’re asked by the scheme administrator what percentage of the lifetime allowance they’ve already used up.

The scheme administrator then calculates how much of the lifetime allowance this crystallisation has used up and issues a lifetime allowance statement to the individual. Before 6 April 2023, if the crystallisation used up more than the remaining lifetime allowance, the scheme administrator asked the individual if they wanted to take the excess as a lump sum or pension and deducted the appropriate charge.  

On the lifetime allowance statement the percentage used up was always based on the lifetime allowance in the tax year the benefit crystallisation event happened, and the balance left was always applied to the lifetime allowance at the next benefit crystallisation event.

If someone had crystallised £100,000 in 2017/18 when the lifetime allowance was £1 million, they’ll have used up 10% of the lifetime allowance.  If they crystallise more pension savings in 2022/23, they could have crystallise up to 90% of £1,073,100 = £965,790 before a lifetime allowance charge applied. 

Equally, once they’d used up all of the lifetime allowance, all further benefit crystallisation events were chargeable – there was no further lifetime allowance available even if the lifetime allowance increases.

What happened when an individual died?

If they die before age 75, that is a benefit crystallisation event, or to be accurate, is one of several benefit crystallisation events depending on the way the benefits are taken.  

Benefit crystallisation event 7 (opens in new window) - the beneficiary takes a lump sum death benefit.

Benefit crystallisation event 5C (opens in new window) - the beneficiary takes a beneficiary drawdown.

Benefit crystallisation event 5D (opens in new window) - the beneficiary takes a dependant’s or nominee’s annuity.

Where beneficiary drawdown is available and a lifetime allowance charge was due, it didn’t make any sense for the excess over the lifetime allowance to be taken as a lump sum if the deceased was under age 75. This is because it attracted a lifetime allowance charge of 55% on the excess.

If the death benefit was taken as beneficiary drawdown, the charge was only 25%, saving 30%, and the entire drawdown fund could be taken at any time. Of course, if death had been after age 75, the withdrawals attracted an income tax liability at the beneficiary’s marginal rate.

Before 6 April 2023, the responsibility for paying any lifetime allowance charge fell on the recipient, not the scheme administrator. The charge is calculated by the Executor of the Estate as only they will know what other untested benefits the deceased had.

However, from 6 April 2023 the excess benefits, if taken as a lump sum, are liable to income tax, at the recipient's marginal rate, and the provider must pay the tax due to HMRC via their PAYE system.

HMRC Pensions tax manual - PTM088500 - The lifetime allowance and the lifetime allowance charge: benefit crystallisation events: summary of the process for testing BCEs against the lifetime allowance when the member has died.

What happens if UK pension savings are transferred overseas?

A transfer overseas can only be to a Qualifying Recognised Overseas Pension Scheme (QROPS) otherwise it’s an unauthorised payment.

From 6 April 2023 there will be no lifetime allowance charge on excess benefits transferred to a QROPS.  Importantly there will also be no income tax charge on the excess benefits.

Before 6 April 2023, unlike a recognised transfer between two UK registered pension schemes, a transfer from a UK scheme to a QROPS is a benefit crystallisation event (benefit crystallisation event 8 - opens in new window). So, if the amount of the transfer is over the relevant lifetime allowance, a lifetime allowance charge would have applied.

However, because the payment was not to the individual, the rate charged was 25%, not 55%, even though it involved a lump sum. If the pension savings were in respect of a pension drawdown plan which started before 6 April 2006 there was no benefit crystallisation event 8 on transfer.

If pension savings were designated as drawdown from 6 April 2006, they will have been tested against the lifetime allowance (benefit crystallisation event 1) or scheme pension (benefit crystallisation event 2).

To prevent double counting the overlap provisions applied. The benefit crystallisation event 1 or benefit crystallisation event 2 amount was deducted from the value being transferred as a benefit crystallisation event 8. The difference was tested against the individual's remaining lifetime allowance and any excess had a 25% charge deducted.

What happens at age 75?

A more or less final check against the lifetime allowance is made at age 75. ‘More or less’ because the only benefit crystallisation event that’s possible after age 75 is a benefit crystallisation event 3. This is when a scheme pension from an occupational pension scheme is increased by more than a permitted margin. This is very unusual.

What’s tested at age 75?

There are no further benefit crystallisation events if an individual crystallises pension rights or dies after age 75.

Can an individual get tax-free cash after age 75?

Yes, if the terms and conditions of plan holding the benefits allow. The maximum that can be taken is the lower of 25% of the fund and 25% of the available lifetime allowance, unless they have some form of tax-free cash protection, more details are below.

You might expect the amount of the lifetime allowance available to be reduced by any benefit crystallisation events at age 75, but for this purpose, the benefit crystallisation event at age 75 that test uncrystallised benefits are ignored. The lifetime allowance used in the maximum tax-free cash calculation isn’t reduced by any age 75 benefit crystallisation events.  

See our article Lifetime allowance at age 75 for more details.

Are there any ways to protect against a lifetime allowance charge?

There are several forms of protection, each of which became available at different points in the history of the lifetime allowance.

When pensions simplification was introduced on 6 April 2006 two types of protection were available:

Primary protection was available if the value of an individual’s pension savings exceeded the original lifetime allowance of £1.5 million on 6 April 2006. An increase factor was applied to the standard lifetime allowance based on the amount of the excess over the lifetime allowance.

So if an individual’s pension savings were worth £3 million on 6 April 2006, they were given a primary protection factor of 1, meaning their personal allowance is twice the standard lifetime allowance. This factor is based on a standard lifetime allowance of £1.8 million (the highest the lifetime allowance reached) until such time as the standard lifetime allowance exceeds £1.8 million.  If an individual had a primary protection factor of 1, their lifetime allowance would be £3.6 million.

Tax-free cash can also have primary protection if the tax-free cash on 6 April 2006 was greater than 25% of the fund and greater than £375,000. 

So tax-free cash of 120% (1.8/1.5) of the tax-free cash value on 6 April 2006 can be paid. If tax-free cash was less than £375,000 on 6 April 2006, the amount payable is the lower of 25% of the fund and 25% of £1.5 million.

Enhanced protection could be given to pension savings of any size on 6 April 2006 although clearly it will only be useful if the pension savings were likely to exceed the lifetime allowance in the future. With enhanced protection, the pension savings can grow to any size but there can be no contributions paid to defined contribution schemes and no relevant benefit accrual (opens in new window) in defined benefit schemes post 6 April 2006. From 6 April 2023 the rules regarding contributions and benefit accrual have been removed.

If tax-free cash on 6 April 2006 was greater than £375,000 and greater than 25% of the fund, enhanced protection of the tax-free cash will allow the same percentage of tax-free cash to apply post 6 April 2006. If tax-free cash was less than £375,000, enhanced protection doesn’t apply to the tax-free cash; the amount available will be the lower of 25% of the fund and 25% of £1.5 million.

Scheme specific tax-free cash protection may also apply.

Both primary and enhanced protection had to be applied for before 6 April 2009.

Fixed protection. The lifetime allowance was steadily reduced from its high point of £1.8 million in 2010/11. It is currently £1,073,100.

Each time it was reduced, fixed protection was made available to allow the individual to retain the previous lifetime allowance.  However, any contributions or benefit accrual results in the loss of fixed protection. Some transfers also result in the loss of fixed protection. From 6 April 2023 the rules regarding contributions, benefit accrual and transfers have been removed.

  • Fixed protection 2012 gives a lifetime allowance protection of £1.8 million
  • Fixed protection 2014 gives a lifetime allowance protection of £1.5 million
  • Fixed protection 2016 gives a lifetime allowance protection of £1.25 million

Fixed protection 2016 is the only one that can still be applied for.

Benefit accrual under fixed protection is different from the relevant benefit accrual that applies to enhanced protection. Fixed protection can be lost in any tax year where there’s been any benefit accrual.

Enhanced protection is only lost at the time of taking benefits or transferring from a defined benefit scheme to a defined contribution scheme – the calculation (opens in new window) to see if relevant benefit accrual has happened is done at that point.

Individual protection allows a protected lifetime allowance up to the capped value of total pension savings at a certain date.

Individual protection 2014 provides protection up to the lower of the value of total pension savings on 5 April 2014 and £1.5 million.  A minimum benefits value of £1.25 million on 5 April 2014 was required.

Individual protection 2016 provides protection equal to the lower of the value of total pension savings on 5 April 2016 and £1.25 million. A minimum benefits value of £1 million on 5 April 2016 is required.

Further contributions, benefit accrual or transfers don’t result in the loss of individual protection 2014 or individual protection 2016.

It is still possible to apply for fixed protection 2016 and individual protection 2016; there’s no time limit for applications.

An individual can even apply retrospectively after a benefit crystallisation event.  In that event, the scheme administrator will have to recalculate the amount of lifetime allowance used up by the benefit crystallisation event and re-issue the lifetime allowance statement.  If any charge had been paid, they’ll also apply to HMRC for a refund of some or all of the charge.

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.