Understanding the lifetime allowance for pension schemes

You can save as much as you like towards your pension but there is a limit on the amount of tax relief you can get. The lifetime allowance is the maximum amount of pension saving you can build up over your life that benefits from tax relief. If you build up pension savings worth more than the lifetime allowance you'll pay a tax charge on the excess.

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Check if your pension savings exceed the lifetime allowance

The lifetime allowance applies to any pension savings you have in:

  • a registered pension scheme
  • an overseas pension scheme that qualifies for UK tax relief for either you or your employer on or after 5 April 2006

The lifetime allowance is currently £1.25 million Previously it was £1.5 million.

The lifetime allowance applies even if you're in a pension scheme that you don't make payments into - for example if you're in a workplace pension that only your employer makes payments into.

If you're in a defined benefit scheme and you take your pension after 6 April 2014

Your pension benefits will be tested against the lifetime allowance of £1.25 million. This level of pension saving is broadly equivalent to an annual pension of:

  • £62,500 if you don't take a lump sum
  • £46,875 if you take the 25% maximum tax free lump sum

If you're in a money purchase scheme

For a money purchase scheme it‘s the value of your pension pot that is used to pay your pension benefits, (such as an annuity and a tax free lump sum) that is tested against the lifetime allowance at the time you take your benefits.

Lifetime allowance rates for previous tax years

Tax relief on contributions to overseas pension schemes

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When your pension savings are tested against the lifetime allowance

Pension savings are tested against the lifetime allowance when you take your pension benefits and on certain other key events. Your scheme administrator will value your pension savings and check if they're worth more than the lifetime allowance.

Other events triggering a lifetime allowance test include:

  • when you reach age 75 in certain circumstances
  • if you transfer your pension pot to a qualifying recognised overseas pension scheme (QROPS)
  • if a pension you're getting increases beyond a certain limit - more in the link below
  • on the payment of certain lump sums - such as serious ill health lump sums, some types of death benefit lump sums

Find out more about these events by following the link to technical guidance below.

When you test for the lifetime allowance

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Rates of lifetime allowance tax charge

The charge is paid on any excess over the lifetime allowance limit. The rate depends on how this excess is paid to you. If the amount over the lifetime allowance is paid as a:

  • lump sum - the rate is 55%
  • pension - the rate is 25%

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Protection from the lifetime allowance charge

In certain situations, for example if you built up a large pension before 6 April 2006, you can have protection from the lifetime allowance. This means that you can build up pension worth more than the lifetime allowance but either:

  • not pay the lifetime allowance charge
  • pay this tax on only part of the excess over the lifetime allowance

More on pension savings and lifetime allowance protection

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Who pays the lifetime allowance tax charge

You and your scheme administrator are jointly responsible for paying the lifetime allowance charge unless the event triggering the lifetime allowance charge is the payment of death benefit.

If the event triggering the tax charge is the payment of a lump sum death benefit the person receiving the lump sum is responsible for paying the tax due. There are special rules for operating the lifetime allowance process - see more in the section 'Lifetime allowance following a member's death' below.

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Reporting and paying the lifetime allowance tax charge to HMRC

The scheme administrator should deduct the lifetime allowance charge due from your pension pot before paying your pension. They will also pay the tax to HM Revenue & Customs (HMRC) using the Accounting for Tax (AFT) Return.

If you're a member and subject to a lifetime allowance charge on your pension you'll need to complete a Self Assessment Tax Return - even if your scheme administrator has already paid HMRC the tax. Your scheme administrator will give you the information that you need to complete the tax return.

More about using the Accounting for Tax (AFT) Return

Registering for Self Assessment

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What happens when you start taking your pension

Starting your pension is the most common event triggering a test of your pension savings against the lifetime allowance. The scheme administrator is jointly responsible with you to pay any charge, so they need to identify any tax due. There is no set process for this. Your scheme administrator may ask you:

  • for full details of any other pensions you have
  • to confirm that your total pension savings are less than the lifetime allowance

If you don't give your scheme administrator the information they may delay paying your pension until they get it.

The way that you choose to take your pension will affect the value of your savings against the lifetime allowance - for example whether you take a lump sum payment or not.

If you have lifetime allowance protection you need to tell your scheme administrator as this may affect the amount of tax due.

After you've taken your pension pot your scheme administrator will tell you how much of the lifetime allowance you've used up. If you're subject to the lifetime allowance charge they'll also tell you how much you have to pay.

Detailed guidance on the process for testing pension savings against the lifetime allowance

Information your scheme administrator must give you about the lifetime allowance

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Lifetime allowance following a member's death

Payment of some lump sums after a member's death triggers a test of pension savings against the lifetime allowance. Usually these lump sums are paid if a member dies while still working. Where this happens the scheme administrator must give all the following information to the member's personal representative within 3 months:

  • the percentage of the lifetime allowance the payment used up
  • when the lump sum was paid

Using the member's records, the personal representative must work out if the pension savings are more than the lifetime allowance. They can ask for extra information from the scheme administrator to allow them to do this.

If the member's pension savings are less than the lifetime allowance the personal representative doesn't need to do anything else. If they're more than the lifetime allowance the personal representative must give HMRC all the following information:

  • the name of the pension scheme and name and address of the scheme administrator paying the lump sum death benefit
  • the member's name
  • the amount and date of payment of the lump sum
  • the amount of tax due

The personal representative must give this information to HMRC by whichever is the later of the following:

  • 13 months after the member died
  • 30 days after they realised that a lifetime allowance charge was due

HMRC will then contact the scheme administrators to find out who received the lump sum(s) and arrange for tax to be assessed against the individual(s) who received the lump sum death benefit.

More about the lifetime allowance process on the member's death

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