PTM081000 - The lifetime allowance and the lifetime allowance charge: essential principles of the lifetime allowance
Glossary PTM000001
The lifetime allowance
Benefit crystallisation events (BCEs)
Standard lifetime allowance
Protected or enhanced lifetime allowance
Reduced lifetime allowance
The lifetime allowance charge
Operation of the lifetime allowance over time
The process for calculating the available lifetime allowance and any lifetime allowance charge
Authorised lump sums that can only be paid if the member has some lifetime allowance available
Lifetime allowance excess lump sum
Sections 214 to 226 Finance Act 2004
Regulations 14 and 15 The Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567
The Registered Pension Schemes (Accounting and Assessment) Regulations 2005 - SI 2005/3454
The Registered Pension Schemes (Enhanced Lifetime Allowance) Regulations 2006 - SI 2006/131
The lifetime allowance
There is no limit on the total amount of authorised benefits a registered pension scheme can provide to its members. However, an individual has a single lifetime allowance in relation to the value of tax-privileged benefits they can draw from such schemes - the value of any authorised benefits paid out in excess of their allowance is subject to a tax charge known as the lifetime allowance charge. This applies to all types of registered pension schemes equally.
For most people the standard lifetime allowance applies. However, there are a number of different forms of lifetime allowance protections which might increase an individual’s lifetime allowance.
An individual will use part of their lifetime allowance most commonly when they start to draw a pension but there are also other occasions that trigger a test of pension savings against the lifetime allowance. An event that results in lifetime allowance being used up is called a ‘benefit crystallisation event’. If the pension savings being tested exceed the member’s available lifetime allowance at that point, a lifetime allowance charge will be due on the excess.
Benefit crystallisation events (BCEs)
The legislation sets out the occasions when a scheme administrator must check whether the pension benefits arising (‘crystallising’) at that point exceed a member’s available lifetime allowance. See PTM088100 for a full list and details of each of the BCEs. Generally speaking, the type of event which is a BCE includes:
- taking pensions
- taking lump sums
- reaching age 75
- death
- transferring to qualifying recognised overseas pension schemes.
When a BCE occurs, the scheme administrator compares the amount being crystallised to the member’s lifetime allowance that is still available. Where the member has died, the personal representatives of the member may be responsible for carrying out this comparison. Any crystallising amount that exceeds the level of lifetime allowance available is charged to tax.
It’s worth mentioning here that an unauthorised payment is not a BCE. Neither is any pension that is paid to a beneficiary from a deceased member’s already-crystallised funds. An individual cannot avoid the lifetime allowance charge either by simply not drawing benefits or taking them overseas. There are BCEs relating to someone reaching age 75 with undrawn entitlements or undrawn designated drawdown funds, and on transfer of benefits to a qualifying recognised overseas pension scheme.
Becoming entitled
A member normally becomes entitled to a pension benefit when they first obtain an actual right to receive that pension. This needs to be distinguished from a prospective right (when a member has the expectation of receiving a pension benefit sometime in the future). However, for income withdrawal, a member becomes entitled to it whenever sums or assets are designated as available for the payment of drawdown pension. See PTM088200.
Simultaneous events
Normally, BCEs use up a member’s available lifetime allowance in the chronological order in which they occur. Where BCEs occur simultaneously the member must decide the order the BCEs take for the purpose of the lifetime allowance test. This is important where the lifetime allowance is exceeded, as the order in which the BCEs occur impacts on the tax that will be charged on the excess. For more detailed guidance on the order of BCEs - see PTM088200.
Pension commencement lump sum is always before the associated pension
The exception to this is where the member becomes entitled to a pension commencement lump sum (which is paid free of income tax). The BCE for this type of lump sum is always viewed as occurring immediately before the BCE for the associated pension benefit, which is taxable.
Standard lifetime allowance
The standard lifetime allowance for each of the tax years 2021-2022, 2022-2023, 2023-2024, 2024-2025 and 2025-2026 is £1,073,100.
Changes in the level of the lifetime allowance since its introduction on 6 April 2006 are shown in the following table. NB: Where an individual has certain protections from the lifetime allowance, all references in PTM to the “standard lifetime allowance” are replaced with the amount protected for so long as the lifetime allowance remains less than the amount protected - see the Glossary definition of the standard lifetime allowance for more detail.
| Tax years | Lifetime allowance |
|---|---|
| 2020-2021 | £1,073,100 |
| 2019-2020 | £1,055,000 |
| 2018-2019 | £1,030,000 |
| 2017-2018 | £1,000,000 |
| 2016-2017 | £1,000,000 |
| 2015-2016 | £1,250,000 |
| 2014-2015 | £1,250,000 |
| 2013-2014 | £1,500,000 |
| 2012-2013 | £1,500,000 |
| 2011-2012 | £1,800,000 |
| 2010-2011 | £1,800,000 |
| 2009-2010 | £1,750,000 |
| 2008-2009 | £1,650,000 |
| 2007-2008 | £1,600,000 |
| 2006-2007 | £1,500,000 |
Protected or enhanced lifetime allowance
There are various lifetime allowance enhancements or protections. These can give the member a personalised lifetime allowance, or protect rights up to a significantly higher level than the standard lifetime allowance (particularly where pre-6 April 2006 rights are protected). See PTM091000 for details of the enhancements and protections which include the following:
- Primary protection (PP)
- Enhanced protection (EP)
- Fixed protection (FP)
- Fixed protection 2014 (FP 2014)
- Fixed protection 2016 (FP 2016)
- Individual protection 2014 (IP 2014)
- Individual protection 2016 (IP 2016)
- Pension credits and debits on divorce
- Non-UK residence or international transfers.
Reduced lifetime allowance
Occasionally, a member may be entitled to less than the standard lifetime allowance where they have:
- a protected pension age less than age 50 at 6 April 2006 - see PTM082000
- benefits in payment before 6 April 2006 (a pre-commencement pension) - see PTM088300.
The lifetime allowance charge
The lifetime allowance charge applies when at a BCE the value crystallising in an individual’s pension scheme is worth more than their available lifetime allowance - see PTM083000
- If the excess is a pension, there’s a 25% charge.
- If the excess is a lump sum, there’s a 55% charge.
It is the scheme administrator who must establish whether a chargeable amount arises at a BCE in a member’s lifetime. But responsibility for paying any lifetime allowance charge is a joint one between the scheme administrator and the member.
Every time there is a BCE, the scheme administrator must give the member a statement showing how much lifetime allowance they’ve used up. When the lifetime allowance charge is due the scheme administrator must give the member a statement to tell them:
- how much is liable to tax,
- how they calculated that amount,
- the amount of tax due, and
- whether the scheme administrator will pay the tax.
See PTM164100 for more details about information requirements and what should be in the member statements. The member will need this information to complete their Self Assessment return for the tax year in which the BCE that incurred a lifetime allowance charge took place. The member is also responsible for providing certain information to the administrator.
Lump sum death benefits and designation to dependant’s or nominee’s drawdown
If the BCE relates to lump sum death benefits or the designation of uncrystallised funds for dependant’s or nominee’s drawdown, the person getting the benefit or making the designation has sole responsibility for paying the charge - see PTM087000.
In this situation, it is the deceased member’s personal representatives who are responsible for establishing whether a chargeable amount arises. HMRC will collect the tax due by issuing an assessment to the recipient, dependant or nominee (as appropriate).
Operation of the lifetime allowance over time
The percentage of the member’s lifetime allowance being used up as a consequence of a BCE is added to any percentage used up previously by the member under the same or any other registered pension scheme.
Example
- Mike crystallises benefits with a capital value of £150,000. The standard lifetime allowance at that point is £1.5 million, so the percentage used up is 10%. If Mike had not crystallised any other benefits previously, he will have 90% of his lifetime allowance still available for the next BCE.
- The same process occurs when Mike crystallises benefits at a future date.
- This time Mike crystallises a further £450,000 when the standard lifetime allowance is £1.8 million. So Mike has used up a further 25% of the standard lifetime allowance. In total, Mike has used up 35% (10% + 25%) of his lifetime allowance.
The percentage of the standard lifetime allowance used up at a particular BCE remains constant year by year even though the standard lifetime allowance is changed in subsequent tax years. So, the 10% of the standard lifetime allowance used up in the example above when the standard lifetime allowance is £1.5 million remains constant at 10% in the later year when the allowance has risen to £1.8 million.
This is to ensure that individuals will face the same real aggregate lifetime allowance on their total pension rights built up with tax relief, irrespective of:
- when they choose to take their pension benefits and the type of benefits they become entitled to, and
- whether benefits are taken from one scheme or from multiple schemes.
The scheme administrator’s BCE statements help individuals keep track of their available lifetime allowance. The scheme administrator is also required to give pension members an annual statement telling them the percentage of the standard lifetime allowance they have used up - see PTM164400.
If the member knows that they have used (say) 30% of the standard lifetime allowance (as shown on the scheme administrator’s statements), they would also know that their available lifetime allowance at their next BCE will be 70%.
The process for calculating the available lifetime allowance and any lifetime allowance charge
When calculating the percentage of the standard lifetime allowance being used up at any BCE, the scheme administrator need only be concerned with the benefits currently being tested under their particular scheme. They do not require details of any other benefits the member may have in other registered pension schemes.
However, to calculate whether the member has enough available lifetime allowance to cover the amount crystallising at that BCE (and whether or not a lifetime allowance charge is due) the scheme administrator may well require details from the member of:
- how much lifetime allowance has already been used by previous BCEs
- what BCEs may be arising at the same time from other registered pension schemes
- what lifetime allowance the member is entitled to.
How a scheme administrator establishes these details is not prescribed by legislation. It may be that a scheme administrator is content in certain circumstances to rely on a simple member declaration. But in other circumstances the scheme administrator may feel a more detailed questionnaire is necessary, with supporting evidence.
However, the tax rules do impose other responsibilities on each party involved in the process of testing against the lifetime allowance. A general summary of the process the administrator will need to undertake is at PTM088400.
The testing process where a member has died is outlined at PTM088500.
Example
Judy decides to draw some of her benefits from a registered pension scheme. She wants to take the maximum lump sum and use the residual funds to purchase a lifetime annuity. The scheme administrator calculates the crystallised value of the level of benefits she wants to draw as being £750,000.
The scheme administrator writes to Judy telling her how much will crystallise for lifetime allowance purposes and the percentage of the current standard lifetime allowance this will represent. The standard lifetime allowance is £1.5 million for this year, so the percentage is 50%. They ask Judy to provide a statement within one month confirming the level of lifetime allowance she anticipates being available on the anticipated BCE date, and to say whether or not she anticipates any other BCE occurring either on or before that date under another scheme. They also ask her whether she is entitled to a protected lifetime allowance or an enhanced lifetime allowance and, if so, to provide evidence of the certificate confirming the exact level of enhancement, as provided by HMRC.
Judy has not drawn any pension benefits from any other source previously and is subject to the standard lifetime allowance. She provides the requested statement confirming she has not used up any lifetime allowance previously and does not anticipate another BCE occurring either by or on the proposed date of the BCE.
The scheme administrator is satisfied that there is no chargeable amount and pays the benefits in full. They send Judy a statement verifying that she has used up 50% of the standard lifetime allowance at the BCE. Judy keeps this for future reference.
A few years later, Judy decides to draw the rest of her benefits under the scheme. The scheme administrator calculates the crystallised value of these remaining benefits as £250,000. The standard lifetime allowance is now £1.25 million so these pension benefits represent 20% of the standard lifetime allowance at that time.
The scheme administrator writes to Judy outlining the above and asking her again about her anticipated available lifetime allowance at the time she wants to draw benefits. Judy still has 50% of her lifetime allowance available.
The new benefits will take Judy up to 70% of her lifetime allowance (50% plus 20%), so again there is no chargeable amount on this BCE. Judy declares to the scheme administrator that she has 50% of the standard lifetime allowance available at that time.
Benefits are paid out by the scheme administrator.
The scheme administrator sends a statement to Judy telling her she has now in aggregate used up 70% of her lifetime allowance (the standard lifetime allowance) through the scheme. This certificate helps Judy keep track of the lifetime allowance she has used up, and evidences this fact where necessary. Judy should keep the certificate for future reference.
Authorised lump sums that can only be paid if the member has some lifetime allowance available
Certain types of authorised lump sum payments can only be made if the member has some lifetime allowance available at the time of the payment. These are:
- pension commencement lump sums (including scheme-specific lump sums)
- serious ill-health lump sums
- trivial commutation lump sums
- winding-up lump sums
- uncrystallised funds pension lump sums.
Brief descriptions of pension commencement lump sums and uncrystallised funds pension lump sums follow. For the full conditions relating to all the above lump sums see PTM063000.
Pension commencement lump sum
When a member becomes entitled to pension benefits under an arrangement then the scheme may also provide that member with a tax-free lump sum - a pension commencement lump sum. There’s a cap on the amount of the pension commencement lump sums the member may draw over their lifetime, in line with the lifetime allowance.
The basic rule is that:
- the lump sum represents a maximum 25% of the capital value of the benefits coming into payment under that arrangement, and
- the total tax-free lump sum payments that may be paid to an individual, from all registered pension schemes, do not exceed 25% of the standard lifetime allowance.
See PTM063200 for full details about the pension commencement lump sum, and why the cap is always measured against the standard lifetime allowance.
Uncrystallised funds pension lump sum
The uncrystallised funds pension lump sum (UFPLS) can be paid on or after 6 April 2015 from money purchase funds which are uncrystallised, that is, have not yet been used to pay a regular pension or designated to a drawdown fund. The full conditions for an UFPLS are described at PTM063300. One of the conditions is that the individual has lifetime allowance remaining at the time of the payment.
If the individual has reached age 75 and at the time of the payment has less lifetime allowance available than the amount of the UFPLS, the tax-free part of the lump sum payment is restricted to 25% of their remaining lifetime allowance.
Lifetime allowance excess lump sum
Where a member’s lifetime allowance has been fully used up, any benefit entitlement crystallising beyond that point may, if the member is under age 75, be paid entirely as a lump sum payment, rather than the normal mixture of pension and lump sum benefits. Subject to the scheme’s rules, any pension entitlement or uncrystallised funds crystallising beyond this point may be commuted and paid entirely as a lump sum.
Any lump sum payment representing the excess funds or rights is called a lifetime allowance excess lump sum - for more detail see PTM084000.