Tax controls on pensions - lifetime allowance

Before 6 April 2023, when you retired you were required to pay an additional tax charge (known as the lifetime allowance tax charge) on any excess amount over the limit.

The current lifetime allowance is £1,073,100

On 6 April 2024, the lifetime allowance will be abolished. The government announced this change on 15 March 2023 and is making legislation to enable the changes.

You still need to tell us about the value of your pension savings for lifetime allowance testing purposes.

However, if you retire after this date you will not be subject to a lifetime allowance tax-charge. Any pension you receive will be taxed in the usual way depending on your personal allowance, the same way as any other income you receive.

The government will also make changes to annual allowance limits and lifetime allowance protections. The maximum tax-free cash limit will remain at 25% of your pension pot up to a maximum of 25% of the current lifetime allowance.

If you previously opted out or moved to the 50/50 section to reduce your pension build up, you may be considering:

• re-joining the scheme
• moving back to the main section

As part of this decision, you should consider:

• the potential impact on any lifetime allowance protections
• annual allowance limits
• other general tax implications

In all cases, we recommend that you get advice from a suitably qualified FCA-registered financial advisor.

The lifetime allowance was introduced in 2006 and the limit has increased and decreased multiple times since.

Each time the lifetime allowance reduced, if you had already planned your pension savings on the basis of the higher lifetime allowance, you were able to protect your pension savings by applying to HMRC for lifetime allowance protection.

While there will be no lifetime allowance tax charge for any retirements after 6 April 2023, you may still benefit from a protected tax-free lump sum if you have a valid protection certificate.

You may still be able to apply for fixed protection (2016) and individual protection (2016) unless you have either primary protection or individual protection (2014).

If you have a valid protection certificate, you should provide us with this at retirement.

You can make contributions to your pension after 6 April 2023 without it invalidating your protected rights if you hold a valid certificate for:

• enhanced protection
• primary protection
• individual protection
• fixed protection (2016) where HMRC received your successful application before 15 March 2023

However, any additional contributions you choose to make will not generate any additional tax-free cash entitlement above your protected limit.

You should also be aware of any other criteria which may invalidate your protection certificate.

Find more information about lifetime allowance protection (GOV.UK).

The lifetime allowance limit represents the total capital value of your pension benefits. It is not how much pension you will be paid or are being paid annually.

The capital value is sometimes referred to as the pension pot value.

After 6 April 2006, we calculate your LGPS pension pot value as:

• 20 x the current annual pension + tax-free lump sum value

Before 6 April 2006, we calculate your LGPS pension pot value as:

• 25 x the annual pension (the lump sum is ignored for lifetime allowance purposes)

On any statement we provide you with (including your annual benefit statement and estimates issued with a retirement pack), we will tell you:

• the pension pot value of your LGPS benefits
• the percentage of the lifetime allowance used up

We can also provide this to you on request.

If you took your pension before 6 April 2023 and you incurred a lifetime allowance tax charge, you are still responsible for meeting this tax charge even though the lifetime allowance has been abolished.

In most cases, you would have been able to choose to meet the tax charge by:

• paying the tax charge immediately by a reduction to your lump sum
• paying the tax directly to HMRC yourself
• asking us to pay the charge for you in return for a permanent reduction to your annual pension – this is called a lifetime allowance debit

If the excess is paid as annual pension, the tax charge will be 25% of the capital value of the excess.

If the excess is taken as a lump sum it will be subject to tax at the rate of 55%.