Lifetime allowance - pre April 2024

Published  06 April 2024
   15 min read

The Finance Act 2024 removed the lifetime allowance completely from 6 April 2024 and replaced it with new allowances.

Here we look at how the lifetime allowance worked before it was abolished.

Key facts

  • Before 6 April 2023, the lifetime allowance was the maximum value of benefits that could be taken from a registered pension scheme without being subject to the lifetime allowance charge.
  • Benefits were tested against the lifetime allowance when a benefit crystallisation event happened. It was possible to protect benefits in excess of the lifetime allowance.
  • The lifetime allowance charge was removed from 6 April 2023 and the lifetime allowance was completely removed from 6 April 2024.
  • During the 2023/24 tax year benefits were still tested against the lifetime allowance. Excess benefits taken as a lump sum were taxed at the recipient's margin rate of income tax.

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

Standard lifetime allowance

Tax year Standard lifetime allowace
2023/24 £1,073,100
2022/23 £1,073,100
2021/22 £1,073,100
2020/21 £1,073,100
2019/20 £1,055,000
2018/19 £1,030,000
2017/18 £1,000,000
2016/17 £1,000,000
2015/16 £1,250,000
2014/15 £1,250,000
2013/14 £1,500,000
2012/13 £1,500,000
2011/12 £1,800,000
2010/11 £1,800,000
2009/10 £1,750,000
2008/09 £1,650,000
2007/08 £1,600,000
2006/07 £1,500,000

 

Changes to the lifetime allowance 2023/24

As part of the Spring 2023 Budget, it was announced that whilst the lifetime allowance charge was removed on 6 April 2023, the lifetime allowance would remain in place until April 2024. This meant that during the 2023/24 tax year, when benefits were taken, the amount crystallised was still tested against the lifetime allowance. But where benefits exceeded the lifetime allowance, there was no lifetime allowance charge applied. Where previously the excess benefits had a 55% or 25% charge deducted, depending on how the benefits were taken, during the 2023/24 tax year the excess was subject to income tax at the recipient’s marginal rate.

When did the lifetime allowance apply?

A test against the lifetime allowance was done when there was a benefit crystallisation event. There were several benefit crystallisation events (opens in new window), the most common of which were:

  • taking benefits
  • dying
  • transferring to a QROPS
  • reaching age 75

Before the lifetime allowance charge was removed, 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 an individual had pension savings of £2,000,000, there was no charge at that point. But if they crystallised all 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 to 5 April 2024 the excess benefits were liable to income tax at the recipient’s marginal rate when they were paid out.

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.

During the 2023/24 tax year any benefits over the lifetime allowance, whether paid as a lump sum or as income, was liable to income tax at the recipient’s marginal rate at the point the benefits are paid.

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 HM Revenue and Customs 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

 

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. Since 6 April 2023 those 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.

The deadline for applying for fixed or individual protection 2016 is 5 April 2025.

Are small lump sums tested against the lifetime allowance?

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

So, if three small pots of £10,000 had been 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 were decrease by £30,000.

Could the lifetime allowance have been 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 was tested against the lifetime allowance?

There were a number of benefit crystallisation events (BCEs), each one triggered a test against the lifetime allowance. These were:

BCE 1 Going into drawdown
BCE 2 Becoming entitled to a scheme pension
BCE 3 Scheme pension already in payment increased beyond the permitted margin
BCE 4 Becoming entitled to a lifetime annuity
BCE 5 Reaching age 75 under a defined benefit scheme or collective money purchase scheme
BCE 5A Reaching age 75 in drawdown
BCE 5B Reaching age 75 with unused funds in a money purchase scheme
BCE 5C Where the member dies before their 75th birthday and uncrystallised funds are used to provide beneficiary drawdown
BCE 5D Where the member dies before their 75th birthday and uncrystallised funds are used to purchase a beneficiary’s lifetime annuity
BCE 6 Where a relevant lump sum is paid to the member. This includes tax-free cash, uncrystallised funds pension lump sums and a serious ill health lump sum.
BCE 7 Where a relevant lump sum is paid on the death of the member
BCE 8 Transfer to a Qualifying Recognised Overseas Pension Scheme
BCE 9

The making of the following authorised member payments as per HMRC Pensions Tax Manual - PTM088700: BCE 9 prescribed authorised member payments:

  • Payment of arrears of pension after death
  • Lump sums based on pension errors
  • PCLS type lump sums paid after death.

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.

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:

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 was only 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. Since 6 April 2023 the rules regarding contributions and benefit accrual were removed for individuals who had valid enhanced protection before 15 March 2023.

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 was £1,073,100 when it was abolished.

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 resulted in the loss of fixed protection. Some transfers also resulted in the loss of fixed protection. Since 6 April 2023 the rules regarding contributions, benefit accrual and transfers were removed for individuals who had valid fixed protection before 15 March 2023.

  • Fixed protection 2012 gave a lifetime allowance protection of £1.8 million.
  • Fixed protection 2014 gave a lifetime allowance protection of £1.5 million.
  • Fixed protection 2016 gave 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 to see if relevant benefit accrual has happened is done at that point.

Individual protection allowed 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 was 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; new applications must be made before 6 April 2025.

An individual could 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.

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 takes a lump sum death benefit.

Benefit crystallisation event 5C - the beneficiary takes a beneficiary drawdown.

Benefit crystallisation event 5D - the beneficiary takes 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.

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

However, after 6 April 2023 and before 6 April 2024 the excess benefits, if taken as a lump sum, were liable to income tax, at the recipient's marginal rate, and the provider had to 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.

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?

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.

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.