Tax controls on pensions - lifetime allowance

The lifetime allowance was the limit you could have in pension savings before you were required to pay a tax charge.

The lifetime allowance was set at £1,073,100 before it was completely abolished on 6 April 2024 and replaced with the following pension tax controls:

• Lump Sum Allowance (LSA) – This limits the total value of tax-free lump sums you can take from all your pensions to £268,275
• Lump Sum & Death Benefit Allowance (LSDBA) – This limits the total value of tax-free lump sums and death benefit lump sums that can be paid in respect of all your pensions to £1,073,100
• Overseas Transfers Allowance (OTA) – This limits the tax-free value of all transfers to Qualified Recognised Overseas Pension Schemes (QROPS) to £1,073,100

If you take a lump sum as part of your LGPS pension package, you will need to know how much Lifetime Allowance you used up before 6 April 2024 as this will affect your available LSA and LSDBA.

Your lifetime allowance usage was measured when a Benefit Crystallisation Event (BCE) occurred. Examples of BCEs include:

• drawing a pension at retirement
• purchasing an annuity
• taking a flexi-access drawdown
• paying a lump sum death grant
• transferring to a QRORPs

It was measured against the total capital value of your pension benefits, which is not the same as annual pension or the actual value of the amount paid.

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

The value of an LGPS pension pot put into payment after 6 April 2006, is worked out as:

• 20 times the current annual pension plus tax-free lump sum

The value of an LGPS pension pot put into payment before 6 April 2006, is worked out as:

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

Once you have your pension pot value, you can work out your lifetime allowance usage.

You can find:

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

on any statement provided to you before 6 April 2024, (including your annual benefit statement and estimates issued with a retirement pack). We can also provide this to you on request.

The lifetime allowance was introduced in 2006 and the limit changed multiple times until it was finally abolished.

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.

There was no lifetime allowance tax charge for any retirements taking place in the 2023/24 tax year.

Having a valid lifetime allowance protection may still be useful as it could entitle you to a higher LSA or LSDBA. Below we have provided a summary of the most common protections. However, you should be aware of any criteria which may invalidate your protection certificate. Refer to the relevant HMRC webpage below for more information for each protection and how they interact with pension tax controls.

• Enhanced protection (no primary protection)
  • LSA will be: £375,000
  • LSDBA will be the value of uncrystallised pension rights on 5 April 2024
• Fixed Protection
  • LSA is £450,000
  • LSDBA is £1,800,000
• Fixed Protection 2014
  • LSA is £375,000
  • LSDBA is £1,500,000
• Fixed protection 2016
  • LSA is £312,500
  • LSDBA is £1,250,000
• Individual protection 2014
  • LSA is the lower of either £375,000 or 25% of the individual’s relevant amount
  • LSDBA is the lower of either £1,500,000 or the individual’s relevant amount
• Individual protection 2016
  • LSA is the lower of either £312,500 or 25% of the individual’s relevant amount
  • LSDBA is the lower of either £1,250,000 or the individual’s relevant amount.

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

You may still be able to apply for fixed protection (2016) and individual protection (2016) until 5 April 2025 unless you have either primary protection or individual protection (2014).For more information and details on how to apply visit the HMRC website.

Find more information about lifetime allowance protection.

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 and reporting it to HMRC, 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%.