The lifetime allowance is the maximum amount of pension scheme funds that can be, or be deemed to be, ‘crystallised’ (usually to provide benefits), in relation to all of a pension scheme member’s registered pension schemes, without incurring a penalty tax charge.
Whenever pension funds are crystallised (known as a Benefit Crystallisation Event) on or after 6 April 2006, when the current pension tax regime came into effect, their value is tested against the member’s lifetime allowance. If the amount crystallised exceeds the member’s remaining lifetime allowance, the excess is subject to a tax charge of 25% if taken as income, or 55% if the member takes the excess as a lump sum (an option that is only available up to their 75th birthday).
Until pension scheme funds have been crystallised they are ‘uncrystallised funds’.
The standard lifetime allowance
The standard lifetime allowance has changed over time as outlined in the chart below:
When introduced on 6 April 2006, the lifetime allowance was £1.5 million and increased for each subsequent tax year until 2010/11 when it was £1.8 million before reducing to £1 million for the tax years 2016/17 and 2017/18.
Since the tax year 2017/18, the standard lifetime allowance has increased in line with the Consumer Prices Index. For tax year 2018/19, it was £1.03 million and for tax year 2019/20, it is £1.055 million. For tax year 2020/21 and 2021/22 it is £1.0731 million.