The lifetime allowance
The Government has recently announced that no-one will pay a lifetime allowance tax charge from 6 April 2023. If a tax charge arose before this date, it is still payable. The lifetime allowance will be abolished completely from 6 April 2024.
Before 6 April 2023, if the value of your pension benefits when you took them was more than the lifetime allowance, or more than any protections you held, you had to pay tax on the excess benefits. This did not include any state pension, state pension credit or any partner’s or dependant’s pension you are entitled to..
The lifetime allowance covered any pension benefits you had in all tax-registered pension arrangements – not just the LGPS.
Your lifetime allowance 02:56
Tax rules limit how much pension you can build up over your lifetime without having to pay a tax charge. This video explains how the lifetime allowance works.Download transcript for “Your lifetime allowance”
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The lifetime allowance has changed a number of times since 2011. The Government has announced that no-one will pay a lifetime allowance tax charge from 6 April 2023. If a tax charge arose before this date, it is still payable. The lifetime allowance will be abolished completely from 6 April 2024.
|Tax year||Lifetime allowance|
|2020/21 to 2023/24||£1,073,100|
How is the lifetime allowance calculated?
Each time you take payment of a pension benefit, the capital value of the benefits you are taking uses up a percentage of your lifetime allowance. Even if your pensions are small, you should keep a record of every pension you receive.
The capital value of pensions that you take after 5 April 2006 is your annual pension multiplied by 20, plus any lump sum you take from the pension scheme. If you have a pension that was first paid before 6 April 2006, this will also be treated as using up part of your lifetime allowance. For these pensions, the capital value is the current annual pension multiplied by 25. Any lump sum you received is ignored.
Before 6 April 2023, when you took your benefits, if the capital value of those benefits was more than your available lifetime allowance, you had to pay tax on the excess. If your excess benefits were paid as a pension, the tax charge was 25% of the excess. The ongoing pension payments were also subject to income tax. If you took the excess benefits as a lump sum, they were taxed once at 55%.
You could choose to pay the tax immediately by a reduction to your lump sum, pay the tax directly to HMRC yourself or ask the scheme to pay the tax for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit.
Changes to the lifetime allowance
The lifetime allowance reduced from £1.25 million to £1 million in 2016. The Government introduced two protections called Fixed Protection 2016 and Individual Protection 2016. These protections are the same in design as Fixed and Individual Protections 2014 which were introduced when the lifetime allowance reduced in 2014.
The Government has announced that no-one will pay a lifetime allowance tax charge from 6 April 2023. The lifetime allowance will be abolished completely from 6 April 2024.
Individual Protection 2016
You can apply for Individual Protection 2016 if the value of your pension savings on 5 April 2016 was more than £1 million. You can’t apply if you have Primary Protection.
Individual Protection 2016 gives a protected lifetime allowance equal to the value of your pension rights on 5 April 2016, up to a maximum of £1.25 million. Before 6 April 2023, you had to pay tax on any pension savings in excess of your protected lifetime allowance.
Fixed protection 2016
You can apply for Fixed Protection 2016 if you expect your pension savings to be more than £1 million when you take them after 6 April 2016. With Fixed Protection 2016, your lifetime allowance is fixed at £1.25 million.
Before 6 April 2023, you would lose Fixed Protection 2016 if your benefits increased by more than the cost of living in any tax year. The cost of living increase in 2016/17 was zero, which meant you could only hold Fixed Protection 2016 if your LGPS membership ended before 6 April 2016. If you remained a member after 6 April 2016, you would have lost this protection.
You would also have lost Fixed Protection if you:
- started a new pension arrangement, other than to accept a transfer of existing pension rights
- paid into a money purchase pension arrangement, other than to a life assurance policy that you started before 6 April 2006
- transferred your pension, except in limited circumstances.
From 6 April 2023, if you hold a valid fixed protection certificate, you will be allowed to build up new pension benefits, join a new pension arrangement, or transfer without losing your protection, as long as you applied for the protection before 15 March 2023.
If you apply for Fixed Protection on or after 15 March 2023, the rules about losing it set out above still apply.
If you lose Fixed Protection, you must let HMRC know within 90 days of the date you could first reasonably be expected to have known about the loss.
You can’t have Fixed Protection 2016 of you already have Primary or Enhanced Protection, Fixed Protection 2012 or Fixed Protection 2014.
Applying for Fixed and Individual Protection 2016
You can still apply to protect your pension lifetime allowance - This link opens in a new browser window by applying to HMRC for Fixed or Individual Protection 2016. There is no deadline for making an application. However, you will need to inform HMRC of the value of your pension savings on 5 April 2016 to apply for Individual Protection 2016. Your pension administrator was only obliged to provide you with this information up to 5 April 2020.
Although the lifetime allowance tax charge will not apply from 6 April 2023, holding a protection may still allow you take a larger tax-free lump sum.
If you successfully apply for protection, the online service will provide you with a reference number that you must keep. You must apply before you take your pension as you will need to give your pension administrator this reference.
When the Government introduced the lifetime allowance in 2006, and when it reduced in 2012 and 2014, it introduced protections for members with large pension pots. If you have applied for a previous protection such as Enhanced Protection, Primary Protection, Fixed Protection 2012 or 2014, or Individual Protection 2014, you should have received a certificate to confirm your protection.
Before 6 April 2023, you may still have been subject to a lifetime allowance charge if your pension exceeded your protected amount or if you lost your protection.
You can find out more about Tax on your private pension contributions - This link opens in a new browser window, these protections and when you may lose them on the Government website.
Taking a tax-free lump sum
The maximum tax-free lump sum you can have when you take your pension is the lower of:
- 25% of the capital value of your LGPS pension
- 25% of your remaining lifetime allowance.
The standard lifetime allowance in 2023/24 is £1,073,100 and 25% of this amount is £268,275. The Government has announced that the no one will pay a lifetime tax charge from 6 April 2023; however, the maximum lump will still be based on 25% of the standard lifetime allowance.
If you have already taken pension benefits from any UK pension scheme, you have used up some of your lifetime allowance. The maximum lump sum you can take is 25% of your remaining lifetime allowance.
If you hold a valid lifetime allowance protection, you may be able to take a lump sum that is larger than £268,275 as long as the lump sum does not exceed 25% of your remaining lifetime allowance.