4. Lifetime allowance

You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently £1 million.

You might be able to protect your pension pot and keep a higher lifetime allowance.

Check how much lifetime allowance you’ve used

Ask your pension provider how much of your lifetime allowance you’ve used.

If you’re in more than one pension scheme, you must add up what you’ve used in all pension schemes you belong to.

What counts towards your allowance depends on the type of pension pot you get.

Type of pension pot What counts towards your lifetime allowance
Defined contribution - personal, stakeholder and most workplace schemes Money in pension pots that goes towards paying you, however you decide to take the money
Defined benefit - some workplace schemes Usually 20 times the pension you get in the first year plus your lump sum - check with your pension provider

Your pension provider may ask for information about other pension schemes you’re in so they can check if you’re above your lifetime allowance when you:

  • decide to take money from a pension pot
  • turn 75
  • transfer your pension overseas

Pay tax if you go above your lifetime allowance

You’ll get a statement from your pension provider telling you how much tax you owe if you go above your lifetime allowance. Your pension provider will deduct the tax before you start getting your pension.

You still need to report the tax deducted by filling in a Self Assessment tax return - you’ll need form SA101 if you’re using paper forms. You’ll get information from your pension provider to help you do this.

If you die before taking your pension HMRC bills the person who inherits your pension for the tax.

Rates

The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you - the rate is:

  • 55% if you get it as a lump sum
  • 25% if you get it any other way, eg pension payments or cash withdrawals

Using lifetime allowance protection

If you have more than £1 million in your pension pot, you can apply to protect it against reductions to the lifetime allowance.

Your notification of protection tells you:

  • how much lifetime allowance you have
  • the type of protection you have, eg ‘primary’, ‘enhanced’ or ‘fixed’
  • your protection notification number

Tell your pension provider the type of protection and the protection notification number when you decide to take money from your pension pot.

Withdrawing cash from a pension pot

You can’t withdraw cash from a defined contribution pension pot (‘uncrystallised funds pension lump sums’) if you have:

  • primary or enhanced protection covering a lump sum worth more than £375,000
  • ‘lifetime allowance enhancement factor’ if your unused lifetime allowance is less than 25% of the cash you want to withdraw

When you lose your protection

You can lose enhanced or fixed protection if you:

  • make new savings in a pension scheme
  • are enrolled in a new workplace pension scheme
  • transfer money between pension schemes in a way that doesn’t meet the transfer rules
  • take enough money out of your pot to make it fall below the standard lifetime allowance

Check with your employer if they are likely to enrol you in a workplace pension. To make sure you don’t lose protection, you can either:

  • opt out of most schemes within a month
  • ask not be enrolled in some schemes - your employer may need evidence of your lifetime allowance protection (eg a notification from HMRC)

Tell HM Revenue and Customs (HMRC) if you lose your protection.

If you have the right to take your pension before 50

You may have a reduced lifetime allowance if you have the right to take your pension before you’re 50 under a pension scheme you joined before 2006.

This only applies to people in certain jobs (eg professional sports, dance and modelling) who start taking their pension before they’re 55.

Your lifetime allowance isn’t reduced if you’re in a pension scheme for uniformed services, eg the armed forces, police and fire services.