Lifetime allowance

Published  06 April 2023
   8 min read

There's no limit on the value of pension savings that can be built up by an individual.

However, if they exceed the lifetime allowance when they are taken, the amount in excess of the lifetime allowance may be subject to income tax at the individual's marginal rate.

Key facts

  • The lifetime allowance is the maximum value of benefits that can be taken from a registered pension scheme before income tax is due on the excess.
  • Benefits are only tested against the lifetime allowance when a benefit crystallisation event happens.
  • It may be possible to protect benefits in excess of the lifetime allowance.
  • The lifetime allowance is currently £1,073,100.
  • The lifetime allowance charge has been removed from 6 April 2023 and the lifetime allowance will be removed completely from 6 April 2024.
  • From 6 April 2024 tax-free cash will be restricted to £268,275, unless an individual has tax-free cash protection.

The lifetime allowance was introduced on 6 April 2006 (A-Day) but has not remained at the same level. It is currently £1,073,100.

Historic lifetime allowance levels can be found in our rates and factors area.

When are benefits tested against the lifetime allowance?

Simply having benefits worth more than the lifetime allowance doesn’t trigger a lifetime allowance charge. Benefits are only tested against the lifetime allowance when a benefit crystallisation event happens. There are various benefit crystallisation events, most obviously when an individual takes benefits or dies. However, there are also some automatic benefit crystallisation events at age 75 which test any uncrystallised benefits or any growth in the value of funds held in a drawdown plan.

A full list of the different types of benefit crystallisation events can be found in HMRC's Pensions Tax Manual.

Valuation of pension benefits

How are defined benefits valued?

Defined benefit schemes can only offer a scheme pension. A scheme pension involves paying a pension for life out of the scheme assets or buying an annuity out of the scheme assets. 

When someone crystallises benefits in a defined benefit scheme, the value of the annual amount of pension promised by the scheme is multiplied by a standard valuation factor of 20:1. Where some of the pension is commuted for a pension commencement lump sum, it is the pension after commutation that is multiplied by the standard valuation factor of 20:1. This factor includes an allowance for annual increases of 5% on the scheme pension. Any defined benefit scheme that provides increases more than 5% can apply to HM Revenue and Customs for a scheme specific valuation factor which can be higher than 20:1. 

Pension commencement lump sums are valued using a factor of 1:1 and are added to the above value.

HMRC Pensions Tax Manual - PTM088620: BCE 2 entitlement to a scheme pension

Money purchase (including cash balance) benefits

How are drawdown benefits valued? 

The valuation basis is based on the actual fund value (market value of the assets) used to secure either:

  • income drawdown (whether capped* or flexi-access drawdown), or
  • short-term annuities

*It's not been possible to set up a new capped drawdown plan since 6 April 2015, unless it’s to receive a transfer of an existing capped drawdown plan.

HMRC Pensions Tax Manual - PTM088610: BCE 1 designation of funds for drawdown during the member's lifetime

How is a secured pension valued? 

The valuation basis used depends on the option chosen when benefits are crystallised. These are:

  • Lifetime annuity - This is simply valued on the basis of the fund value used to secure the lifetime annuity.
  • Scheme pension - Same as defined benefit schemes above.

Pension commencement lump sums are valued based on a valuation factor of 1:1 and added to the value above.

HMRC Pensions Tax Manual - PTM088640: BCE 4 purchase of a lifetime annuity

How are benefits in payment before 6 April 2006 valued?

Benefits that were in payment before 6 April 2006 also have to be included when valuing benefits taken after 6 April 2006. The benefits are valued when the first benefit crystallisation event takes place after 6 April 2006. Annuities in payment are valued at 25:1.

If the benefits are provided by capped income drawdown it is 80% of the GAD maximum income in force at the time of that first BCE valued at 25:1.

If the capped drawdown plan is converted to flexi-access drawdown the valuation is 80% of the GAD maximum income for the year of conversion valued at 25:1.

The reason why they are valued at 25:1 rather than 20:1 is because the individual will most likely have taken a tax-free lump sum when the benefits were originally taken.

HMRC Pensions Tax Manual - PTM088300: Benefit crystallisation events: pensions in payment on 6 April 2006

What happens if the lifetime allowance is exceeded?

If an individual has benefits more than the lifetime allowance when they are taken, if the excess is taken as a lump sum, then income tax at their marginal rate is paid on the excess.

Is it still possible to apply for protection from the lifetime allowance?

Yes. Two forms of protection, fixed protection 2016 and individual protection 2016 were introduced on 6 April 2016, when the lifetime allowance reduced to £1 million.

Those who applied for fixed protection 2016 before 15 March 2023 had to ensure active membership of pension schemes ceased between 6 April 2016 and 5 April 2023. From 6 April 2023 individuals can accrue new pension benefits, join new arrangements or transfer in certain circumstances without losing this protection.

For those applying for fixed protection 2016 after 15 March 2023, they cannot accrue new pension benefits, join new arrangements or transfer in certain circumstances without losing this protection.

There is no deadline for applying for fixed or individual protection 2016.

Are small lump sums tested against the lifetime allowance?

The payment of a small lump sum is not a benefit crystallisation event and as such the funds are not tested against the lifetime allowance.

So, if three small pots of £10,000 each are transferred from a non-occupational scheme to separate non-occupational arrangements and immediately taken, the value of an individual’s pension rights to be tested against the lifetime allowance will decrease by £30,000.

Can the lifetime allowance be reduced?

There are two circumstances where the available lifetime allowance can be reduced.

One is where the individual has a benefit crystallisation event after 6 April 2006 and has any pension in payment that started before 6 April 2006.

At that benefit crystallisation event, annuities and scheme pensions in payment are valued as shown in the 'How are benefits in payment before 6 April 2006 valued?' section above. 

The value can’t lead to the lifetime allowance being exceeded, but it can reduce the lifetime allowance available to zero.

The other circumstance is where the individual draws benefits before age 50 because they have a protected pension age.

Before 6 April 2006, individuals in certain occupations such as models, divers and sportspeople could take pension benefits before age 50. Because of the greater value of a pension being paid earlier, the lifetime allowance is reduced in these cases.

The individual’s lifetime allowance is reduced by 2.5% for each complete year between the date on which the benefit crystallisation event occurs and the date on which the individual will reach age 55 (age 57 from 6 April 2028).

Let’s look at an example:

Clare has a protected pension age of 35. She takes her benefits just after her 35th birthday. The normal minimum pension age is 55 and the standard lifetime allowance is £1,073,100.

Her lifetime allowance is reduced by 47.5%; this is 2.5% for each of the 19 complete years between the date of taking benefits and the normal minimum pension age. Her lifetime allowance is therefore reduced to £563,377.50.




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.