Lifetime Allowance

These FAQs are for financial advisers only. They mustn't be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.

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The lifetime allowance was introduced on 6 April 2006, and is the amount of tax privileged pension savings that an individual is allowed. There is no limit to the amount of pension benefits that can be paid from registered pension schemes, but if the value of an individual’s benefits from all their registered pension arrangements (including those taken before 6 April 2006) is above their available lifetime allowance, then a tax charge known as the ‘lifetime allowance charge’ will apply.

The standard lifetime allowance (SLA) since 2006/07 for those with no fund protection is shown in the table below:

Tax year Standard Lifetime allowance (SLA)
2006/07 £1.5m
2007/08 £1.6m
2008/09 £1.65m
2009/10 £1.75m
2010/11 £1.8m
2011/12 £1.8m
2012/13 £1.5m
2013/14 £1.5m
2014/15 £1.25m
2015/16 £1.25m
2016/17 £1m
2017/18 £1m
2018/19 £1,030,000

The SLA will increase each tax year in line with the consumer prices index (CPI) from tax year 2018/19 onwards.

Generally a test has to be carried out when benefits are taken before age 75 or at age 75 (if not tested before) to check whether the lifetime allowance is exceeded. This test is called a benefit crystallisation event (BCE). Further information about BCEs can be found here in our ‘BCEs and valuing benefits against the LTA’ FAQs.

The standard lifetime allowance (SLA) was introduced on 6 April 2006 and reached its highest level of £1.8m in tax years 2010/11 and 2011/12. Various forms of fund protection have been made available over the years to offer some transitional protection for individuals who have or are likely to build up funds in excess of the SLA. Further information on fund protection can be found here in our ‘Transitional Protection’ FAQs. 

A lifetime allowance charge (LAC) applies on any excess funds if the lifetime allowance is exceeded when pension benefits are actually taken. This can be on benefits above the standard lifetime allowance or an individual’s personal lifetime allowance. The lifetime allowance charge currently is :

  • 55% if the excess benefits are taken as a lump sum, known as a lifetime allowance excess lump sum, or
  • 25% if the excess benefits are taken as income, which will then be taxed at the individual’s marginal rate of income tax. The effect of a 25% LAC together with 40% higher rate income tax equates to 55%. The effect of a 25% LAC together with 45% additional rate income tax equates to 58.75%.

Both the scheme administrator and member are equally and separately liable for the whole LAC. Payment by one will discharge the other from liability, to the extent that it has been paid.

To discharge their liability, the scheme administrator will usually pay any LAC to HMRC and the payment of this charge will reduce the amount of pension benefits that can be paid to the member from the pension arrangement.

However, sometimes a pension scheme may choose to pay the LAC itself, 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 is over the member’s available lifetime allowance and a LAC is due, then the scheme may wish 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 will also count as part of the excess benefits (‘the chargeable amount’) when calculating the LAC charge. In other words, an additional 25% charge will be due on any money taken from scheme funds to pay the LAC, assuming the excess is taken as income.

The member will pay their own liability for the charge on their self assessment claiming a credit for any tax paid by the scheme administrator.

Where the scheme administrator has relied on incomplete or inaccurate information provided by the member and due to this doesn’t pay all or part of the due charge, they may be discharged from their liability by HMRC and the liability of the remaining outstanding charge due will fall solely on the member. 

Pensions Technical Services.