What is the lifetime allowance?
Lifetime Allowance Video Transcript (112KB, PDF)
The lifetime allowance was the total value of all pension benefits you could have without triggering an excess benefits tax charge. The Government abolished the lifetime allowance from 6 April 2024. If the value of your pension benefits when you took them (not including any state retirement pension, state pension credit or any partner’s or dependant’s pension you are entitled to) was more than the lifetime allowance, or more than any protections you may have, you will have paid tax on the excess benefits.
The lifetime allowance covered any pension benefits you have in all tax-registered pension arrangements – not just the LGPS (NI). The lifetime allowance was introduced in 2006 and was reduced in 2012, 2014 and again in 2016. Each time the lifetime allowance reduced, you were able to protect any pension savings above the lifetime allowance by applying to HMRC for a lifetime allowance protection. Information on those protections and how to apply if you think you are eligible, can be found here: https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance
| Tax Year | Lifetime Allowance |
|---|---|
| 2011/12 | £1.8 million |
| 2012/13 | £1.5 million |
| 2013/14 | £1.5 million |
| 2014/15 | £1.25 million |
| 2015/16 | £1.25 million |
| 2016/17 | £1.00 million |
| 2017/18 | £1.00 million |
| 2018/19 | £1.03 million |
| 2019/20 | £1,055.000 |
| 2020/21 to 2025/26 | £1,073.000 |
Lifetime Allowance 2011-2026
How is the lifetime allowance calculated?
For pensions that you first took on or after 6 April 2006, the capital value was worked out by multiplying your annual pension by 20 and adding any lump sum you take from the pension scheme. The figures used for this calculation are those that you are taking e.g. after any conversion of pension for additional lump sum.
Each time you took payment of a pension benefit, the capital value of the benefits you took is expressed as percentage of the lifetime allowance limit that applies on that date and is deducted from your available lifetime allowance. So, even if your pensions are small and individually will not be more than the lifetime allowance, you should keep a record of any pensions you receive.
If you have a pension that was first paid before 6 April 2006, this will also be treated as having used up part of your lifetime allowance. For these pensions, the capital value is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.
When you took your LGPS (NI) benefits, NILGOSC will have calculated the capital value of your pension benefits. If your benefits exceeded the lifetime allowance and you take a lump sum in excess of £268,275 (or your protected lump sum amount), the excess was taxed at your marginal rate. That tax charge would have been paid by a reduction to your total lump sum.
Example one – Person under the lifetime allowance
Maureen retires on 31 May 2021:
- LGPS (NI) annual pension: £25,000
- LGPS (NI) tax-free lump sum: £45,000
- AVC taken as a lump sum: £116,375
- Capital value of benefits = (£25,000 × 20) + £45,000 + £116,375 = £661,375
Maureen has not drawn any pension benefits previously.
The capital value of her benefits is less than the LTA for 2021/22 of £1,073,100.
She has used 61.63% of the available LTA.
Taking a tax-free lump sum
The maximum tax-free lump sum you can have when you take your LGPS (NI) pension under the lifetime allowance was the lowest of the following:
- 25% of the capital value of your LGPS (NI) benefits, or
- 25% of the lifetime allowance (or a protected lifetime allowance), or
- 25% of your remaining lifetime allowance if you have previously taken payment of (crystallised) pension benefits as you will have already used up some of your lifetime allowance.
I think I might be affected – what should I do?
Before considering any action to reduce your tax liabilities, you should always seek independent financial advice from a Financial Conduct Authority registered adviser. For help in choosing an independent financial adviser visit the MoneyHelper website.
If you have any questions about your LGPS membership or benefits, please contact us.
More information
This section provides an overview of the previous LTA rules. It should not be treated as a complete and authoritative statement of the law. The rules governing LTA were complex and are now abolished. If you are unsure how to proceed, you are advised to obtain specialist independent financial advice.