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What is the pension lifetime allowance and how does it work?
From 6 April 2024, the old pension lifetime allowance (LTA) that applied when you take benefits from your pension was removed. Instead, new allowances now apply when you take a tax-free lump sum or transfer to an overseas pension scheme.
Lifetime allowance key facts
- The lifetime allowance (LTA) charge was removed from 6 April 2023.
- The lifetime allowance was abolished from 6 April 2024.
- The lifetime allowance limit remains at £1,073,100.
- Excess benefits taken as a lump sum will be taxed at the recipient’s margin rate of income tax.
- Before 6 April 2023, the lifetime allowance was the maximum value of benefits that can be taken from a registered pension scheme without being subject to the lifetime allowance charge, unless appropriate protections applied.
- Benefits are tested against the lifetime allowance when a benefit crystallisation event happens.
- It was possible to protect pension benefits in excess of the lifetime allowance.
What was the lifetime allowance?
The pensions lifetime allowance was the maximum amount of money that you can have across all your private pensions and still enjoy full tax benefits.
Prior to 6 April 2023, if you breached the lifetime allowance for pensions, you would have been liable to pay a tax charge, which could be up to 55%.
The lifetime allowance covered all savings that you have across all your pensions, be that defined contribution or defined benefit schemes.
It didn’t apply to the state pension, pension credit or any income you received as a dependent on your partner’s pension.
How was the lifetime allowance calculated?
If you have defined contribution (DC) pensions, it was easy to work out whether you were in danger of reaching the allowance – it was simply a case of totalling the value of all your pensions.
It was more complicated for defined benefit (DB) pensions, that’s because they pay an income that is guaranteed for the rest of the member’s life, meaning it’s impossible to quantify their value exactly. Instead, DB schemes take the annual income payable multiplied by 20 and add in the value of any lumps you have taken or AVC benefits. If the resulting figure was in excess of the lifetime allowance, a tax charge would have been applied.
Previous lifetime allowances
Lifetime allowance and protection
If you had taken out lifetime allowance protection since 2006, you may have a protected allowance worth more than the former LTA of £1,073,100 as well as the ability to take out more than 25% tax free cash.
Since 2006, various forms of lifetime allowance protection have been offered to savers who had pensions in excess of the lifetime allowance when it reduced.
HMRC has now confirmed that these higher rates of tax-free cash will be honoured and, from 6 April 2023, that they will also be able to pay more into their pension.
Learn more: Lifetime Allowance Protections
How can Pension Wise help?
If you have a defined contribution pension scheme and are 50 or over, then you can access free, impartial guidance on your pension options by booking a face to face or telephone appointment with Pension Wise, a service from MoneyHelper.
If you are under 50, you can still access free, impartial help and information about your pensions from MoneyHelper.
Learn more about our SIPP
Learn how to make the most of your SIPP with our useful guides.
Important information: A SIPP is for those wanting to make their own investment decisions when saving for retirement. As investment values can go down as well as up, the amount you retire with could be worth less than you invested. Usually, you won’t be able to withdraw your money until age 55 (57 from 2028). Before transferring your pension, check if you’ll be charged any exit fees and make sure you don't lose any valuable benefits such as guaranteed annuity rates, lower protected pension age or matching employer contributions. If you’re unsure about opening a SIPP or transferring your pension(s), please speak to an authorised financial adviser.