Lifetime allowance for pension savings

The lifetime allowance for most people is £1,073,100 in the tax year 2023/24.

In previous years, you would have paid a lifetime allowance charge on any pensions savings over this amount. But from 6 April 2023 that charge has been removed. Certain lump sums payments which would have been subject to a lifetime allowance charge will instead be subject to Income Tax at the recipient’s marginal rate. The lifetime allowance is set to be abolished in April 2024.

Further official guidance is expected on these changes which were announced in March 2023. It is important that where you have total pension benefits in excess of the lifetime allowance, you check how the changes apply to you. You can talk to your pension provider, a regulated financial adviser or call us on 0800 011 3797Opens in a new window.    

The allowance applies to the total of all the pensions you have, including the value of pensions you have through:

• any defined benefit (final salary or career average) schemes you belong to
• any savings you have in defined contribution pension
• but excluding your State Pension.

There’s no limit on how much you build up in pension benefits. But checks are carried out at certain times to see if the value of your pension benefits exceeds the lifetime allowance.

If you’ve built up more than the value of the lifetime allowance when a check is carried out, you might have to pay Income Tax – see the section below Charges and taxes if you exceed the lifetime allowance which explains what payments are subject to tax.

Checks are typically carried out:

• when you start drawing a defined benefit pension
• when you take an income or lump sum from a defined contribution pension (see examples below)
• if you transfer a pension overseas before age 75
• if you reach your 75^th birthday and have a pension in drawdown or that you haven’t touched  
• if you die before age 75 and have pensions you haven’t touched.

After age 75, there are generally no further checks against the lifetime allowance. 

Every time you start taking money from one of your schemes, its value is compared against your remaining lifetime allowance to see if there’s extra tax to pay.

You can work out whether you’re likely to be affected by adding up the expected value of your pensions to see if they might go over the lifetime allowance.

Be aware, though, that what matters is the value of your pensions at the point the checks are done. So you might need to take into account how the value of your pensions might change between now and the time you expect a check to be done.

For example, if you’re 55 now, but don’t expect to begin taking any money out until you’re 60, you need to consider if the value of your pensions might increase between now and then. If it does, this will use up more of the lifetime allowance available to you.

You work out the value of pensions differently depending on the type of scheme you’re in:

• For defined benefit pension schemes, you normally calculate the total value by multiplying your expected annual pension by 20.
• You also need to add the amount of any separate tax-free cash lump sum.

For example, if the annual pension you will receive is £15,000 a year and you will get a tax-free lump sum of £30,000 as well, the value of that pension for lifetime allowance purposes is £330,000 ((20 x £15,000) + £30,000).  

• For defined contribution pension schemes, including all personal pensions, the value will be the total amount in your pension pots.
• If you’re in a defined contribution pension, there are several ways of using your pension pot when you retire. A test is carried out each time you access money from a pension pot you haven’t yet touched. For example, normally, you can take up to 25% of your pension pot as a tax-free lump sum. You must then use the balance to buy a guaranteed income or set up a flexible retirement income. This means a check will be made against the total value of the pension pot you intend to access. So, if the pension pot was £100,000 and you just took 25% as a tax-free lump sum, it’s the whole £100,000 that’s tested.
• If you take several lump sums from your pension, known as an ‘Uncrystallised Funds Pension Lump Sum’, it’s the total value of the lump sum you withdraw that is tested rather than the whole pension pot. So, if the pension pot was £100,000 and you took a lump sum of £10,000 where 25% is tax-free and the other 75% is taxed as earnings, only the £10,000 would be tested at this point. The other £90,000 would be checked later.  
• If you use your money to set up a flexible retirement income (known as pension drawdown), any money you still have in the pension when you reach age 75 will be checked again. If the money has grown so it is more than you had when you first moved into pension drawdown, (ignoring any tax-free lump sum you took at that time), this will use up more of your lifetime allowance. 

• If you have taken any pension benefits before 6 April 2006, these will need to be considered the first time a check is made against the lifetime allowance after 6 April 2006. This will reduce your available lifetime allowance. For defined benefit schemes, you normally calculate the total value by multiplying your annual pension (at the time of the check) by 25.  
• If you have money in capped pension drawdown, it is 80% of 25 times your current annual drawdown limit.
• If you have more than one pension, you will use up lifetime allowance in the order you take them. The lifetime allowance you’ll need to use in the calculation is the allowance in the tax year in which you take the pension income or the lump sum.
• Certain tax-free lump-sum benefits paid out to your survivors if you die before age 75 also use up your lifetime allowance.
• Whenever you start taking money from your pension, a statement from your scheme should tell you how much of your lifetime allowance you’re using up.

If the total value of your pension benefits taken to date exceeds the lifetime allowance when a check is done, up until 5 April 2023 there used to be a lifetime allowance tax charge to pay on the excess plus Income Tax on any additional income you received. This was called the lifetime allowance charge.

From 6 April 2023 you will pay no lifetime allowance charge. But certain payments which would have previously been subject to a lifetime allowance charge at 55% are now taxed at your marginal rate of Income Tax where the lifetime allowance is exceeded:

• serious ill-health lump sum - where your life expectancy is reduced to less than one year due to illness, and your pension provider pays your whole pension pot as a cash lump sum.

• lifetime allowance excess lump sum – where you are under age 75 and receive the amount over the lifetime allowance as a lump sum

• uncrystallised funds lump sum death benefit – where the value of a defined contribution pension pot is paid as a lump sum on death

• defined benefits lump sum death benefit – where a lump sum is paid on the death of a member of a defined benefit pension scheme

As a result of the abolition of the lifetime allowance, the maximum amount you can usually take as tax-free cash will be frozen at £268,275, which is a quarter (25%) of the lifetime allowance of £1,073,100. However, if you have previously applied for protection (see below) and were entitled to a higher tax-free lump sum on 5 April 2023 you will continue to be entitled to this higher sum.

If you apply for Fixed Protection 2016 on or after 15 March 2023 you may also be entitled to a higher amount of tax-free cash. You'll need to meet certain conditions to continue to be entitled to it.

The lifetime allowance charge – how it worked:

The way the charge applied until 5 April 2023 depended on whether the excess was taken as a lump sum or as income.

If you took the excess as a lump sum, it was taxed at 55%.

Your pension provider or administrator deducted the tax from your pot and paid it to HMRC, paying the balance to you.

If you took an income from the excess – either flexibly (pension drawdown), as a guaranteed income (annuity), or as a scheme pension – there was an immediate  25% tax charge.

This was on top of any Income Tax you paid on the income when you received it.

For defined benefit pension schemes, your pension scheme usually paid the 25% tax on your behalf and recovered it from you by reducing your pension.

For defined contribution pension schemes, your pension scheme administrator usually paid the 25% tax to HMRC from your pension pot, leaving you with the remaining 75% to use towards your retirement income.

Example: someone who pays tax at the higher rate expected to get £1,000 a year as income but the 25% lifetime allowance charge reduced this to £750 a year. After Income Tax at 40%, they would be left with £450 a year.

This means the lifetime allowance charge and Income Tax combined have reduced their income by 55% – the same as the lifetime allowance charge if they had taken their benefits as a lump sum instead of income.

If you have sizeable pensions, you could consider applying for protection if your pension savings are expected to exceed the lifetime allowance threshold.

There were and are protections that can help you avoid a tax charge by giving you a higher lifetime allowance.

You can check if you already have protection but you will need an account for HMRC online services.

If you don’t have an account, you can create one.

There are still two protection schemes you can apply for – Individual Protection 2016 and Fixed Protection 2016. 

These protections mean that you may be able to receive a tax-free lump sum payment higher than the current limit of £268,275. 

This gives you a personal lifetime allowance equal to the value of your pensions on 5 April 2016, the day before the lower allowance was introduced – subject to a maximum of £1.25m.

The protection rules are complicated. And the ways the protection can be lost differ depending on whether your retirement income (including lump sums) comes from a defined contribution or a defined benefit pension scheme.

You might want to get professional financial advice or speak to your pension provider or administrator when deciding whether to apply for protection and working out when and how to take benefits from your pension scheme.

With Individual Protection 2016 you can continue saving into a pension. But any pension savings above the level of your protected lifetime allowance will potentially be liable for tax on the excess.

There is no minimum pension value needed to apply for Fixed Protection 2016 (FP2016).

Unlike IP2016, FP2016 isn’t available to anyone that holds Primary Protection, Enhanced Protection or Fixed Protection 2012/2014.

This gives you a lifetime allowance of £1.25m with the potential to take up to £312,500 (25% of the protected lifetime allowance) as a tax-free lump sum. It is possible to lose this protection in certain circumstances. If you did not apply for this protection before 15 March 2023, to avoid losing this protection, you must:

• Make sure you opt out of automatic enrolment quickly – you usually have only one month to do this and get your contribution refunded.
• Not make any more payments into any defined contribution pension scheme after 5 April 2016 – if you do, you’ll automatically lose your protection and revert to the current standard lifetime allowance limit.
• Think carefully before continuing as an active member of a defined benefit scheme – opting out of active membership and becoming a deferred member significantly reduces the risk of losing your protection. You might want to discuss your options with a financial adviser.

If you apply for fixed protection on 15 March 2023 or later, you’ll need to have stopped saving into a pension or building up benefits from 6 April 2016. If you applied for fixed protection before 15 March 2023, then from 6 April 2023 onwards you will be able to build up new pension benefits, join new pension schemes or transfer to another pension scheme without losing this protection.

You can apply for and check protections from the reductions in lifetime allowance with HMRC at GOV.UKOpens in a new window

If you’re unable to use the online service you can call the HMRC Pensions helpline for applications on 0300 123 1079Opens in a new window.

There’s no application deadline to apply for these.

However, to rely on the protection, you must have applied and received a reference number from HMRC before your pension is tested against the lifetime allowance.

This is a complex area. If you think your pensions are likely to exceed the lifetime allowance, it’s a good idea to speak to a regulated financial adviser or get specialist tax advice.