The lifetime allowance

If you have been diligently saving into a pension throughout your working life, you should be entitled to feel confident about your retirement. But unfortunately, the best savers sometimes find themselves inadvertently breaching their pension lifetime allowance and being charged an additional tax that erodes their savings.

If you are a high-income earner or wealthy individual, you could be putting too much into your pension and risk exceeding the pension lifetime allowance. 

The following questions and answers are intended to help you avoid this tax charge. 

What is the lifetime allowance?

The lifetime allowance is a limit on the amount you accrue within pension plans in your lifetime before you trigger an additional tax charge. By pension benefits, we mean money you receive from your pension in any form, whether that’s a lump sum, a flexible income, an annuity income or through any other method.

This lifetime allowance applies to your total pension savings, which may be in different pensions.

How much is the lifetime allowance?

The current lifetime allowance is £1,073,100. However, the Lifetime Allowance charge will be removed from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill.

What happens if you exceed the lifetime allowance?

If the excess funds over the lifetime allowance are moved into drawdown or used to purchase an annuity, a 25% lifetime allowance charge is deducted before the balance is placed in drawdown or used to purchase an annuity. Then each annuity payment and any drawdown withdrawals taken are subject to normal income tax at your highest rate.

How is the usage of your lifetime allowance measured?

Each time you access your pension benefits (for example, by purchasing an annuity, receiving a lump sum or establishing a flexible income), this is recorded as a ‘benefit crystallisation event’. There is an additional benefit crystallisation event when you turn 75 and finally only on death before 75 with uncrystallised funds (or death in service lump sums paid out before 75).

Is lifetime allowance protection available?

You can only protect your pension from the lifetime allowance if your savings were worth more than £1 million on 5 April 2016, or if you have had no pension funding after 5 April 2016 (regardless of benefit values) – fixed protection 2016 at £1.25m. Total benefits must be over £1m at 5 April 2016 for IP16 and the lifetime allowance given is the value at 5 April 2016 capped at £1.25m.

You may be able to protect your pension savings up to £1.25 million, or up to the value of your pension on that date, depending on the type of protection you have.

Is it possible to avoid the lifetime allowance charge?

If you do not have lifetime allowance protection and you are approaching the limit, there are various actions you can consider. These include stopping your contributions and, instead, investing your money into an alternative tax-efficient environment, changing your investment strategy or starting retirement earlier.

Who does the lifetime allowance affect most?

The lifetime allowance affects high earners and those approaching retirement age the most, including those with defined benefit pensions. As the value of high earners’ pensions rises over the next five years towards a lifetime limit that will remain fixed, more and more individuals may find they need to stop contributing to avoid breaching the limit.

Should I obtain professional financial advice?

The rules around the lifetime allowance are very complex and making the right decisions can feel difficult. Receiving professional financial advice will help to identify if you have a problem and offer different solutions to consider, based on a full review of your unique circumstances.

Last updated: March 2023