Lifetime allowance for pension savings

The lifetime allowance for most people is £1,073,100 in the tax year 2022/23 and has been frozen at this level until the 2025/26 tax year.

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 pensions, but excludes your State 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 a tax charge.

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 a pension 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 can 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 can 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 took 25% as 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 ‘UFPLS’, 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 exceeds the lifetime allowance when a check is done, there will be tax to pay on the excess. This is called the lifetime allowance charge.

The way the charge applies depends on whether the excess is taken as a lump sum or as income.

If you take the excess as a lump sum, it’s taxed at 55%.

Your pension provider or administrator should deduct the tax and pay it to HMRC, paying the balance to you.

If you keep the money in the pension so you can take an income from it – either flexibly (pension drawdown), as a guaranteed income (annuity), or as a scheme pension – there’s an immediate  25% tax charge.

This is on top of any Income Tax you pay on the income you receive, when you receive it.

For defined benefit pension schemes, your pension scheme might decide to pay the tax on your behalf and recover it from you by reducing your pension.

For defined contribution pension schemes, your pension scheme administrator should pay 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 want to avoid the lifetime allowance charge, it’s important to monitor the value of your pensions, and especially the increase in value of   any defined benefit pensions as these can be surprisingly large.

You might also want to 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. For more information about how to apply, see below.

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 be liable for tax on the excess, called the lifetime allowance charge.

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, or the current lifetime allowance, whichever is higher. It is possible to lose this protection in certain circumstances. 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.

No, you’ll need to have stopped saving into a pension or building up benefits from 6 April 2016.

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 1079.

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.