Please note: the content on this page was updated following the publication of the Finance (No. 2) Act 2023. Furthermore, the Government has stated its intention to abolish the lifetime allowance (LTA) from the 2024/25 tax year. Once the details have been published, we will make the necessary updates to the page.
What is the lifetime allowance?
For most individuals, the lifetime allowance is the upper limit on benefits they can crystallise in aggregate in all of their registered pension schemes, without incurring a lifetime allowance tax charge.
Prior to 6 April 2023, if you exceeded your remaining lifetime allowance at any time when crystallising benefits, the excess was subject to a 55% tax charge if paid as a lump sum. If it was instead used to provide you with a drawdown pension or to buy an annuity, the tax charge prior to tax year 2023/24 was 25% and the payments of drawdown pension or annuity would be assessable income for tax purposes. Please note that the option to take the excess as a lump sum is only available before you are 75.
For the 2023/24 tax year, the lifetime allowance tax charge is being set at £0.
However, in certain circumstances, members/beneficiaries will pay tax at their marginal rate on any excess above the lifetime allowance.
From the 2024/25 tax year it is proposed that the lifetime allowance will be abolished. You may have had a higher 'protected' personal lifetime allowance if certain conditions were satisfied at particular time in the past and you have a valid certificate or reference from HMRC.
However, the maximum an individual can claim as a tax-free Pension Commencement Lump Sum (PCLS) is limited to a maximum of £268,275 (25% of £1,073,100 (the standard lifetime allowance as at 6 April 2023)) except where you previously held some form of lifetime allowance protection where your previous entitlement to PCLS will be retained.
The lifetime allowance for previous tax years was:
|2024/25 - the lifetime allowance is proposed to be abolished
|2020/21 - £1,073,100
|2016/17 - £1,000,000
|2023/24 - £1,073,100 - the charge is set at 0%
|2019/20 - £1,055,000
|2015/16 - £1,250,000
|2022/23 - £1,073,100
|2018/19 - £1,030,000
|2014/15 - £1,250,000
|2021/22 - £1,073,100
|£2017/18 - £1,000,000
|2013/14 - £1,500,000
Proposed abolition of the lifetime allowance
In the Spring budget 2023 the Chancellor proposed the abolition of the LTA from 6 April 2024.
The complete abolition of the LTA from the pensions system will require a substantial re-writing of the legislation. As result, HMRC began a major consultation process by issuing a Policy Paper on 18 July 2023. It is too early to tell exactly what the legislative framework will look like from 6 April 2024, but the Policy Paper proposes that "authorised lump sums and lump sum death benefits will be tested against a new threshold, set at the same level as the present LTA, £1,073,100. Individuals will not pay tax where lump sums do not take them above this level. Any lump sums paid above this level will be taxed at the individuals' or beneficiaries' marginal rate."
Types of lifetime allowance protection.
Lifetime allowance protection(s) were introduced to prevent individuals with previously accumulated pension savings under existing regimes being disadvantaged should their funds exceed subsequent reductions in the standard lifetime allowance. The main forms of protection are:
- Enhanced protection
- Primary protection
- Fixed protection 2012
- Fixed protection 2014
- Individual protection 2014
- Fixed protection 2016
- Individual protection 2016
Prior to 6 April 2023, if you exceeded your remaining LTA at any time when crystallising benefits, the excess was subject to a 55% tax charge if paid as a lump sum. If it was instead used to provide you with a drawdown pension or to buy an annuity, the tax charge prior to tax year 2023/24 was 25% and the payments of drawdown pension or annuity would be assessable income for tax purposes. Please note that the option to take the excess as a lump sum is only available before you are 75.
It is possible for a member to have more than one form of lifetime allowance protection. Other forms of protection include enhancement factors in respect of pension credits received following a pension sharing order on divorce and transfers received from a qualifying recognised overseas pension scheme (QROPS). There are currently only two types of lifetime allowance protection which individuals can still apply for:
|Am I eligible and what does it do?
|Can I keep building up my pension?
Other types of protection you can hold at any time
|Other types of protection you cannot hold at the same time
|Individual protection 2016
|Available provided your pension savings were worth more than £1 million at 5 April 2016.
Protects your lifetime allowance to the lower of:
|Yes, but when you put benefits into payment and their value exceeds your protected lifetime allowance, the excess will be subject to a tax charge.
|Fixed protection 2016
|Available provided you or your employer haven't added to any of your pension schemes since 5 April 2016 and had opted out of any workplace pension scheme by 5 April 2016.
Fixes your lifetime allowance at £1.25 million.
|No, except in limited circumstances. If you do, you will:
|Individual protection 2014
Individual protection 2016
Fixed protection 2012
Fixed protection 2014
- Individual protection 2016 will remain dormant until you lose or give up one of your previous protections.
- Individual protection 2014 will override fixed protection 2016 but any contributions paid after 6 April 2016 will result in your fixed protection 2016 being lost.
- You must apply online to HMRC for fixed protection 2016 or individual protection 2016. Protection can be applied for online to HMRC.
- If protection is lost, or if pension savings put into payment exceed any protected level of lifetime allowance, a lifetime allowance charge may apply. Protection may also be affected by auto-enrolment.
- The value of an individual's benefits that came into payment before 6 April 2006 is only taken into account for lifetime allowance purposes where the individual also has benefits that come into payment after 5 April 2006.
- If the standard lifetime allowance increases beyond an individual's protected lifetime allowance, the standard lifetime allowance will then replace the lower protected lifetime allowance.