Understanding your lifetime allowance

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It’s important to think about what the value of your pension savings could be in the future, as you may have to pay a lifetime allowance tax charge if they’re above certain limits when you come to take your benefits.

We explain below what these limits are. You can also find more information on the HMRC website(Opens new window)(Opens new window).

What is a lifetime allowance?

This is the maximum value of benefits you can take from all your registered pension schemes before you have to pay a lifetime allowance tax charge - unless you have enhanced protection.

When you take your benefits, they’ll be tested against your available standard lifetime allowance or personal lifetime allowance (unless you have enhanced protection). If you go over this, a lifetime allowance tax charge will be payable on the excess - this is currently 55% for lump sums, and 25% for funds used to buy pension income (which is also taxed under the Pay As You Earn (PAYE) system).

The standard lifetime allowance

The standard lifetime allowance for the tax year 2018/2019 is £1,030.000.

Personal lifetime allowance

However, if you have applied for fund protection, you'll have a higher personal lifetime allowance.

Individual protection sets the lifetime allowance at the level of your pension savings:

  • as at 5 April 2014 for individual protection 2014, up to a limit of £1.5 million; and
  • as at 5 April 2016 for individual protection 2016, up to a limit of £1.25 million.

It provides protection against the lifetime allowance charge for benefits up to these levels. If the standard lifetime allowance rises above the individual protection level in the future, the higher amount will apply.

If you have individual protection you can make additional pension contributions if you want to, and keep the protection, but you’d have to pay tax on anything over your personal lifetime allowance when you come to take benefits.

You can apply for individual protection online - though you need to have an HMRC Online Services Account.

HMRC will give you a protection reference number which you'll need to provide to your pension scheme each time you take your benefits if you have individual protection 2016.

Personal lifetime allowance

You will also have a personal lifetime allowance if you have a type of tax protection that gives you an enhancement factor. A personal lifetime allowance will be higher than the standard lifetime allowance.

Primary protection is the most well-known type of protection that gives an enhancement factor.

If you’d built up pension savings of more than £1.5 million as at 5 April 2006, you could apply for primary protection – which would give you an enhancement to the standard lifetime allowance.

Since 6 April 2012 the allowance for primary protection has been calculated as:

£1.8 million + (£1.8 million x the enhancement factor shown on your protection certificate)

If the standard lifetime allowance rises above £1.8 million, then that higher amount will apply.

If you have primary protection, you can make further pension contributions if you want to, and keep the protection, but you’ll have to pay tax on anything over your personal lifetime allowance when you come to take benefits.

Applications for primary protection closed on 5 April 2009.

This provides full protection from the lifetime allowance charge for the value of the whole of your pension savings as at 5 April 2006, regardless of subsequent growth, as long as the protection is still held when you come to take benefits.

If you have enhanced protection, it will remain in place unless you lose it because you break one of the conditions for keeping enhanced protection (which include making further contributions to a money purchase plan at any time on or after 6 April 2006), or inform HMRC that you no longer want it. You can find more information on the HMRC website(Opens new window)(Opens new window).

This information is based on our understanding of current, taxation law and HMRC practice, which may change.