Lifetime allowance

Often referred to as the standard lifetime allowance, the table below shows how the lifetime allowance has changed since it was introduced in 2006/07. From a high of £1.8m, the lifetime allowance has reduced significantly.

From 2018/19 onwards, the intention was for the lifetime allowance to increase each tax year broadly in line with the Consumer Price Index. In the March 2021 budget, it was announced that the lifetime allowance will remain frozen at £1,073,100 until 5 April 2026. However, in the March 2023 budget the removal of the lifetime allowance in April 2024 was announced.

People potentially disadvantaged by the lifetime allowance reductions have had scope to protect themselves against the reductions – see the section ‘Lifetime allowance protection’.

In some circumstances applying the lifetime allowance could be seen as unfair.  For example, people whose pension benefits were worth more than the lifetime allowance when it was first introduced, or when it was subsequently decreased. Consequently, various forms of lifetime allowance protection have been made available over the years to offer some transitional protection for individuals who have built up (or may build up) pension funds in excess of the lifetime allowance. 
If transitional protection is in place, the standard lifetime allowance won’t apply, and the individual will have a lifetime allowance which is personal to them.

While it may seem that lifetime allowance protection will no longer be relevant, a cap on the pension commencement lump sum was placed at 25% of the current lifetime allowance of £1,073,100. This means that the maximum PCLS payable under most circumstances will be £268,275. However, individuals with lifetime allowance protection will continue to be able to take up to 25% of their protected amount.

Further information on lifetime allowance protection can be found in our Fund Protection guide.

Note that ‘pension fund’ in this article includes the value put on defined benefits for the purpose of measuring them against the lifetime allowance.

The standard lifetime allowance will apply to most people, and some will have a higher lifetime allowance as a result of lifetime allowance protection – see the previous section. However, HM Revenue & Customs (HMRC) recognise that there are some circumstances when it would be appropriate to increase an individual’s lifetime allowance.

Scheme member acquires a pension share - if a scheme member acquires a pension share following a divorce and the share arose from a pension in payment, they may be entitled to a higher lifetime allowance. You can find out more about this in our Pensions and Divorce guide.

Overseas transfer in – if someone transfers a fund from an overseas pension scheme to a UK registered pension scheme, they can apply to HMRC for an enhancement to their lifetime allowance – the ‘recognised overseas scheme transfer factor’. The enhancement recognises that the transferred fund would not have benefitted from UK tax reliefs so should not count against the lifetime allowance. Note that the transferring scheme would have to be a ‘recognised’ overseas pension scheme, as defined by HMRC.

Scheme member working abroad – generally, someone working outside the UK will not receive UK tax relief on contributions to, or benefits accrued under, a UK registered pension scheme while they’re overseas. In this case, they may apply to HMRC for an enhancement to their lifetime allowance, known as the ‘non-residence factor’.

In some circumstances, a member may be able to take benefits before the normal minimum pension age (currently 55, changing to 57 on 6^th April 2028); you can read about this in our Pension Age guide. If someone relies on a protected pension age to take benefits before the age of 50 (not 55), their lifetime allowance will be reduced by 2.5% for each complete year between the vesting date and the date they would reach normal minimum pension age.

Generally, a test is carried out when pension benefits are taken before age 75 or, if not already taken, at age 75. A test is also done when pension funds are transferred to a ‘qualifying recognised overseas pension scheme’. The test checks whether or not the lifetime allowance is exceeded and is carried out whenever there’s a benefit crystallisation event (BCE); each BCE reduces the available lifetime allowance. 

Examples of BCEs are taking a pension commencement lump sum and designating funds for drawdown. Pensions which came into payment before 6 April 2006 are not BCEs but will be counted against the lifetime allowance at the first BCE on or after 6 April 2006. More information about BCEs can be found in our BCEs and valuing benefits against the LTA section of this guide.
A member should tell the scheme administrator if they have any form of lifetime allowance protection before a BCE occurs. After a BCE, the scheme administrator will tell the member how much of the lifetime allowance has been used up.

A lifetime allowance charge (LAC) previously applied if the lifetime allowance was exceeded when pension benefits are taken. The LAC would apply to the funds in excess of the standard lifetime allowance or, if applicable, an individual’s personal lifetime allowance.

The LAC in 2022/23 was:

• 55% on that part of the excess funds taken as a lump sum, known as a lifetime allowance excess lump sum, or
• 25% on that part of the excess funds used for income (e.g., used to buy an annuity or designated for drawdown). Subsequent annuity payments or drawdown income taken will then be taxed at the individual’s marginal rate of income tax.

However, since the removal of the LAC, funds in excess of the lifetime allowance will be taxed at the recipient’s marginal rate at the point pension benefits are taken, either as a lump sum or as income from drawdown.

Until 6^th April 2023, both the scheme administrator and member were equally and separately liable for the whole LAC.  Payment by one would discharge the other from liability for the LAC, to the extent that it had been paid.  To discharge their liability, the scheme administrator would usually deduct the LAC from the excess funds and pay it to HMRC via their online quarterly scheme return.

However, sometimes a pension scheme could choose to pay the LAC from the scheme’s own resources, and so avoid reducing the member’s benefits. For example, if a defined benefit occupational pension scheme promised to pay a member two-thirds of their final salary, but this amount was over the member’s available lifetime allowance and an LAC was due, then the scheme may have wished to fulfil its promise to the member and pay the LAC from scheme funds.  If a scheme chooses to do this, the LAC paid from scheme funds would also count as part of the excess benefits (‘the chargeable amount’) when calculating the LAC charge. In other words, an additional 25% charge would be due on any money taken from scheme funds to pay the LAC, assuming the excess was taken as income.

The scheme administrator would send details of any LAC due to the member. The member would account for their own liability for the LAC via self-assessment, claiming a credit for any LAC paid by the scheme administrator.

Where the scheme administrator had relied on incomplete or inaccurate information provided by the member and as a result didn’t pay all or part of the due charge, they could have been discharged from their liability by HMRC and the liability for the remaining outstanding charge due would fall solely on the member.

However, since 6^th April 2023, the liability to pay tax at their marguinal rate on funds in excess of the lifetime allowance will fall solely on the scheme member.

HMRC’s guidance on the lifetime allowance, including the lifetime allowance protection options, can be found at: