Introduction and History of Pension Lifetime Allowance
Published / Last Updated on 01/11/2023
The Lifetime Allowance (LTA) is the maximum amount that you can build up in all your combined pension funds during your lifetime. This is all pension schemes in your name (both employer and employee contributions) but does not include your state pension.
The LTA started in 2006 with significant changes in 2012, 2014, 2016 and more recently in 2023/24.
- 2006* = £1.5m LTA increasing to £1.8m over the years and then in
- 2012* = LTA reduced from £1.8m to £1.5m.
- 2014* = LTA reduced from £1.5m to £1.25m.
- 2016* = LTA reduced from £1.25m to £1.0m.
- 2017 – 2020 = LTA increased by inflation to £1,073,100.
- 2021 onwards = Frozen at £1,073,100.
* At different reductions points of the LTA, you were allowed to protect yourself if you were already higher than the newly reduced LTA via Primary Protection, Enhanced Protection and Individual Protection schemes.
Valuing your Pensions for Lifetime Allowance
- Defined Contribution/Money Purchase/Invested Funds = The actual value of the pension funds when you took benefits e.g., the lump sum or flexible drawdown or annuity.
- Defined Benefit/Final Salary/Career Average Salary = Multiple set by the Government Actuaries Department (GAD) of 20 X the value of your pension rights, e.g., pension £20k pa X 20 = £400,000 – this means you have used up £400,000 of your lifetime allowance.
- This is usually expressed as a %. E.g., if LTA was £1,078,100 and you had Defined Contribution Scheme valued at £250,000 and Defined Benefit scheme equivalent value of £400,000, the % of LTA used would be £650,000/£1,073,100 X % = 60.57% LTA used and 39.43% LTA remaining.
Exceeding the Lifetime Allowance
If you exceeded the lifetime allowance when taking benefits, you pay a lifetime allowance charge on the excess usually at 50% for lump sums paid and 25% for annuity income/pension income paid.
Lifetime Allowance Disappearing (but not quite)
In the Spring Budget of March 2023, Chancellor Jeremy Hunt announced that:
- 2023/24 - When exceeding the lifetime allowance of £1,078,100, the excess tax charge is reduced to 0% from 6th April 2023.
- 2023/24 onwards - The maximum combined total tax-free lump sums will remain capped at 25% of £1,073,100 i.e., £268,275.
- 2024/25 onwards – The Lifetime allowance is abolished but will remain to cap the maximum tax-free lump sum only.
Caveat: The Labour Party has suggested that if they are elected in the General Election 2024, they may reintroduce the Lifetime Allowance, but we suspect this will not be retrospective.
