Lifetime allowance - pre April 2024

Published  05 June 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 is possible to protect benefits in excess of the lifetime allowance in some circumstances.
  • A deadline of 5 April 2025 applies for those applying for fixed protection 2016 or individual protection 2016.
  • 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 standard lifetime allowance did not stay at the same level since it was introduced:

Standard lifetime allowance

Tax year

Standard lifetime allowance

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

What was tested against the lifetime allowance?

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

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 individual dies before their 75th birthday and uncrystallised funds are used to provide beneficiary drawdown.
BCE 5D Where the individual 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 individual. 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 individual.
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.

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.  

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?

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:

Type of protection

Conditions

Primary protection

This was used by individuals who had a benefits value on 5 April 2006 over the lifetime allowance of £1.5 million. These individuals could register their own personal lifetime allowance. It was expressed as a primary protection factor which was used to calculate the individual's personal lifetime allowance when benefits are taken. Before 6 April 2023 any amounts above this was subject to a lifetime allowance charge.

 

Due to the reduction in the lifetime allowance, from 6 April 2012, the lifetime allowance used to calculate the level of personal lifetime allowance remained at £1.8 million.

 

Tax-free cash lump sum

If pre-6 April 2006 tax-free cash was less than £375,000 (25% of the lifetime allowance on 6 April 2006) the amount payable was the lesser of 25% of the benefit value and 25% of £1.5 million. Before 6 April 2024 it was 25% of the lifetime allowance when benefits were taken.

 

The tax-free cash was protected as a monetary amount if it exceeded 25% of the lifetime allowance on 5 April 2006. From 6 April 2012 the amount payable was the amount of tax-free cash available on 5 April 2006, increased by 20%

Enhanced protection

This applied to individuals who wanted full protection from the lifetime allowance charge when they come to take their benefits. Enhanced protection allowed the pension fund to grow to any amount without it being subject to the lifetime allowance.

 

Anyone who selected enhanced protection had to stop paying into any money purchase scheme (excluding any on-going contracted-out payments to an existing scheme) prior to 6 April 2006. Members of defined benefit schemes or cash balance arrangement could only build up limited benefits in a registered pension scheme on or after 6 April 2006. Anyone who broke these conditions, before 6 April 2023, without advising HMRC, could have faced a financial penalty.

 

Since 6 April 2023 the restriction on paying contribution/benefit accrual has been removed and will not trigger the loss of enhanced protection.

 

There was no minimum benefits value to register for enhanced protection. An individual who applied for enhanced protection could also apply for primary protection if their benefits value exceeded £1.5 million on 5 April 2006.

 

Tax-free cash

An individual could also protect their tax-free cash using enhanced protection.

 

An individual with an entitlement to tax-free cash of more than 25% of the lifetime allowance (£375,000) and more than 25% of the fund on 6 April 2006 could protect their tax-free cash entitlement.

 

If they took their benefits before 6 April 2023, their tax-free cash was based on the same percentage of their benefits value at crystallisation as it was on 5 April 2006.

 

Since 6 April 2023, their tax-free cash was also based on the same percentage of their benefits value at crystallisation as it was on 5 April 2006.  However, the percentage is applied to their total benefits value on 5 April 2023.

 

An individual with an entitlement to tax-free cash of more than 25% of their benefits value on 6 April 2006, but less than 25% of the lifetime allowance on 6 April 2006 (£375,000), couldn't protect the tax-free cash amount using enhanced protection. However, scheme specific tax-free cash protection may apply.

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

Fixed protection

Type of protection

Giving a lifetime allowance of:

Contributions had to stop before:

Had to apply by:

Fixed protection 2012
£1.8 million 6 April 2012 5 April 2012
Fixed protection 2014
£1.5 million 6 April 2014 5 April 2014
Fixed protection 2016
£1.25 million 6 April 2016

5 April 2025

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

Type of protection

Giving a lifetime allowance of:

Eligibility

Had to apply by:

Individual protection 2014

lower of:

  • £1.5 million, or
  • value of benefits at 5 April 2014
An individual’s benefits value had to be above £1.25 million between 6 April 2014 and 5 April 2016 5 April 2017
Individual protection 2016

lower of:

  • £1.25 million, or
  • value of benefits at 5 April 2016
An individual’s benefits value had to be above £1 million between 6 April 2016 and 5 April 2018

5 April 2025

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.

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.