Lifetime allowance and benefit crystallisation events before April 2024

What was the lifetime allowance?

The lifetime allowance, introduced on 6 April 2006 (A-Day), limited the amount of pension benefits an individual could build up over their lifetime before a tax charge applied.

From 6 April 2024, the lifetime allowance was abolished.

The standard lifetime allowance did not stay at the same level since it was introduced:

Standard lifetime allowance

What was tested against the lifetime allowance?

There were several benefit crystallisation events (BCEs), each one triggered a test against the lifetime allowance:

What wasn't tested against the lifetime allowance?

The payment of the following were not benefit crystallisation events and weren’t tested against the lifetime allowance:

• trivial commutation lump sums
• small lump sums
• trivial commutation lump sum (paid in connection with a scheme-specific pension commencement lump sum)
• winding-up lump sums
• payment of a relevant accretion
• refund of excess contributions lump sums

Any benefits already in payment pre-6 April 2006 were never benefits crystallisation events.

What was the lifetime allowance charge?

Before 6 April 2023, if an individual crystallised benefits above the lifetime allowance, there was a lifetime allowance charge.

How much was charged 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) was charged at 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 then 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.

What were the changes to the lifetime allowance for the 2023/24 tax year?

The changes from 6 April 2023 were:

• The lifetime allowance charge was removed.
• Taxation of any lifetime allowance excess lump sum, serious ill-health lump sum, defined benefits lump sum death benefit and uncrystallised funds lump sum death benefit above the lifetime allowance changed from a 55% tax charge to taxation at an individual’s marginal rate of income tax.
• An individual who applied for enhanced protection or fixed protection 2012, 2014 or 2016 before 15 March 2023, and had received a valid certificate/reference number, can have a ‘protection cessation event’ on or after 6 April 2023 and will not lose their protection.
• Those with enhanced protection and a registered tax-free cash percentage shown on their enhanced protection certificate were still entitled to a higher tax-free cash based on the value of their pension fund on 5 April 2023.
• Pension benefits above the lifetime allowance taken as income, for example as a drawdown pension, was taxed at the individual’s marginal rate of income tax.
• Although the age 75 test was still performed in the 2023/24 tax year, if the lifetime allowance was exceeded, there was no lifetime allowance charge. When the individual subsequently took their benefits as a scheme pension, lifetime annuity and/or as drawdown they were taxed at their marginal rate of income tax.
• The amount that could be paid as a tax-free standalone lump sum was limited to the value of the standalone lump sum on 5 April 2023. Any amount over the value on 5 April 2023 can still be paid as a standalone lump sum but it was taxed at the individual's marginal rate of income tax. 

How were pension benefits valued for the lifetime allowance?

Defined benefits

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 crystallised benefits in a defined benefit scheme, the value of the annual amount of pension promised by the scheme was multiplied by a standard valuation factor of 20:1. Where some of the pension was commuted for a pension commencement lump sum, it was the pension after commutation that was multiplied by the standard valuation factor of 20:1. This factor included an allowance for annual increases of 5% on the scheme pension. Any defined benefit scheme that provided increases more than 5% could apply to HMRC for a scheme specific valuation factor which could be higher than 20:1. 

Pension commencement lump sums were 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

Drawdown 

The valuation was 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

Secured pension  

The valuation depended on the option chosen when benefits were crystallised. These were:

• Lifetime annuity - the fund value used to secure the lifetime annuity.
• Scheme pension - same as defined benefit schemes above.

Pension commencement lump sums were 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

Benefits in payment before 6 April 2006

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

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

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

The reason why they were 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

Could the lifetime allowance be reduced?

There were two circumstances where the available lifetime allowance could have been reduced.

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

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

The value couldn’t lead to the lifetime allowance being exceeded, it could only reduce the lifetime allowance available to zero.

The other circumstance was where the individual took benefits before age 50 because they had 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 was reduced in these cases.

The individual’s lifetime allowance was reduced by 2.5% for each complete year between the date on which the benefit crystallisation event occurred 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 took her benefits just after her 35th birthday. The normal minimum pension age is 55 and the standard lifetime allowance was £1,073,100.

Her lifetime allowance was 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 was therefore reduced to £563,377.50.

What happened when an individual died?

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

• Benefit crystallisation event 7 - the beneficiary took a lump sum death benefit.
• Benefit crystallisation event 5C - the beneficiary took a beneficiary drawdown.
• Benefit crystallisation event 5D - the beneficiary took a dependant’s or nominee’s annuity.

Where beneficiary drawdown was 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 was 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.

It was up to the deceased’s legal personal representative to identify if there was any chargeable amount after the payment of a defined benefits lump sum death benefit or uncrystallised funds lump sum death benefit. It was also their responsibility to report the excess to HMRC.

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.

Were beneficiary benefits tested against the lifetime allowance?

Lifetime allowance checks only applied to pension savings that an individual built up. On their death there was a test against their lifetime allowance, NOT the beneficiary’s.

What happened at age 75?

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

What was tested at age 75?

• Any uncrystallised defined benefit pension savings – benefit crystallisation event 5.
• Any growth in a drawdown plan since it was set up – benefit crystallisation event 5A.
• Any uncrystallised defined contribution pension savings – benefit crystallisation event 5B.

There were no further benefit crystallisation events if an individual crystallised pension rights or died after age 75.

What happened if UK pension savings were transferred overseas?

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

After 6 April 2023 and before 6 April 2024 there was no lifetime allowance charge on excess benefits transferred to a QROPS. Importantly there was also 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 was a benefit crystallisation event (benefit crystallisation event 8). So, if the amount of the transfer was 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.

Was it possible to apply for protection from the lifetime allowance?

There were 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:

With the reduction of the lifetime allowance, further protections were introduced:

Fixed protection

Before 6 April 2023 to keep fixed protection applied for before 15 March 2023 an individual:

• couldn't start a new arrangement other than to accept a transfer of existing pension rights
• couldn't have benefit accrual
• was subject to restrictions on where and how they could transfer benefits

If the individual broke one of these conditions fixed protection was lost. The individual must tell HMRC if fixed protection is lost.

If somebody applies for fixed protection after 15 March 2023, fixed protection will be lost if an individual:

• starts a new arrangement other than to accept a transfer of existing pension rights
• has benefit accrual
• will be subject to restrictions on where and how they can transfer benefits

Individual protection

An individual could not apply for individual protection if they already had primary protection.

They could continue to contribute to the plan and individual protection could only be reduced or lost if the individual’s pension rights become subject to a pension debit as part of a pension sharing order on divorce.

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

Yes. It is still possible to apply for fixed protection 2016 and individual protection 2016. The deadline for applying is 5 April 2025.

For more details on how to apply, visit HMRC’s Protect your pension lifetime allowance.