What is the pension lifetime allowance and how does it work?

Lifetime allowance key facts

• The lifetime allowance (LTA) charge has been removed from 6 April 2023. 
• The lifetime allowance is due to be abolished from 6 April 2024.
• The lifetime allowance limit remains at £1,073,100. 
• Benefits will still be required to be tested against the lifetime allowance in the 2023/24 tax year.
• 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, unless appropriate protections applied.  
• Benefits are tested against the lifetime allowance when a benefit crystallisation event happens. 
• It was possible to protect pension benefits in excess of the lifetime allowance. 

What is the lifetime allowance? 

The pensions lifetime allowance is the maximum amount of money that you can have across all your private pensions and still enjoy full tax benefits. 

Prior to 6 April 2023, if you breached the lifetime allowance for pensions, you would have been liable to pay a tax charge, which could be up to 55%. 

The lifetime allowance covers all savings that you have across all your pensions, be that defined contribution or defined benefit schemes.

It doesn’t apply to the state pension, pension credit or any income you receive as a dependent on your partner’s pension. 

How was the lifetime allowance calculated?  

If you have defined contribution (DC) pensions, it was easy to work out whether you were in danger of reaching the allowance – it was simply a case of totalling the value of all your pensions. 

It was more complicated for defined benefit (DB) pensions, that’s because they pay an income that is guaranteed for the rest of the member’s life, meaning it’s impossible to quantify their value exactly. Instead, DB schemes take the annual income payable multiplied by 20 and add in the value of any lumps you have taken or AVC benefits. If the resulting figure was in excess of the lifetime allowance, a tax charge would have been applied. 

Lifetime allowance and protection

If you had taken out lifetime allowance protection since 2006, you may have a protected allowance worth more than the current £1,073,100 as well as the ability to take out more than 25% tax free cash. 

Since 2006, various forms of lifetime allowance protection have been offered to savers who had pensions in excess of the lifetime allowance when it reduced. 

HMRC has now confirmed that these higher rates of tax-free cash will be honoured and, from 6 April 2023, that they will also be able to pay more into their pension. 

Learn more: Lifetime Allowance Protections

The lifetime allowance in 2023 

Even though there is no longer any charge for breaching the annual allowance, it’s important to note that the allowance itself remains in place until 5 April 2024. 

This means that all the necessary administration around the lifetime allowance that your provider might need to conduct will continue until that date. This includes lifetime allowance checks are certain points, known as benefit crystallisation events. For example:  

• Taking income or a lump sum from a defined contribution pension 
• Taking income from a defined benefit pension 
• When you turn 75 and are in drawdown or have pensions that you are yet to access 
• If you die before age 75 and haven’t accessed your pensions 

After the age of 75 there are unlikely to be any further checks or tests against the lifetime allowance. 

Learn more: What happens to my SIPP when I reach age 75?