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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These FAQs cover the rules relating to the lifetime allowance when a scheme member takes benefits. They don’t cover the lifetime allowance rules when a scheme member dies or where pension benefits are shared or subject to an attachment order following divorce – these are covered in our ‘Death benefits’ and ‘Divorce and dissolution’ FAQs.

The lifetime allowance is a limit on the value of benefits that can be paid to, or in respect of, an individual from registered pension schemes. Although there is no absolute limit on the benefits that can be paid, if their aggregate value exceeds the lifetime allowance a special tax charge may apply; this is called the ‘lifetime allowance charge’.

Often referred to as the standard lifetime allowance, for 2019/20 it’s set at £1,055,000.

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, the lifetime allowance will increase each tax year in line with the Consumer Prices Index.

People potentially disadvantaged by the lifetime allowance reductions have scope to protect themselves against the reductions – see the section ‘Can benefits in excess of the lifetime allowance be protected?’

Tax year Lifetime allowance
2019/20 £1,055,000
2018/19 £1,030,000
2017/18 £1,000,000
2016/17 £1,000,000
2015/16 £1,250,000
2014/15 £1,250,000
2013/14 £1,500,000
2012/13 £1,500,000
2011/12 £1,800,000
2010/11 £1,800,000
2009/10 £1,750,000
2008/09 £1,650,000
2007/08 £1,600,000
2006/07 £1,500,000

In most circumstances, no. However, applying the lifetime allowance to some people could be seen as unfair.  For example, people whose benefits were worth more than the lifetime allowance when it was first introduced, or when it was subsequently decreased. Consequently, various forms of fund protection have been made available over the years to offer some transitional protection for individuals who have built up (or may build up) 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.  

Further information on fund protection can be found in our ‘Transitional Protection’ FAQs. 

Note that ‘fund’ in these FAQs 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 transitional protection – see the previous question. However, 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 correspondingly higher lifetime allowance. You can read about this in our ‘Pension sharing’ FAQs.

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); you can read about this in our ‘Protected pension age’ FAQs. 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 benefits are taken before age 75 or, if not already taken, at age 75. A test is also done when 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/after 6 April 2006. Further information about BCEs can be found in our ‘BCEs and valuing benefits against the LTA’ FAQs.

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) applies if the lifetime allowance is exceeded when benefits are actually taken. This will be on funds above the standard lifetime allowance or, if appropriate, an individual’s personal lifetime allowance. 

The LAC is currently:

  • 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 taken as income. The income will then be taxed at the individual’s marginal rate of income tax. 

Both the scheme administrator and member are equally and separately liable for the whole LAC.  Payment by one will discharge the other from liability for the LAC, to the extent that it has been paid.  To discharge their liability, the scheme administrator will usually deduct the LAC from the excess funds and pay it to HMRC via their online quarterly scheme return.

However, sometimes a pension scheme may 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 is over the member’s available lifetime allowance and an 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 scheme administrator will send details of any LAC due to the member. The member will 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 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 for the remaining outstanding charge due will fall solely on the member.

It depends on the circumstances. You can read more about this in our ‘Death benefits’ FAQs.

Pensions Technical Services.