Contents

• The lifetime allowance
• Benefit crystallisation events 
• A lifetime allowance check – valuing benefits
• Age 75
• Low Pension ages
• Transitional protections
• An example of lifetime allowance 

 

The Lifetime Allowance (LTA)

The LTA was a limit on total pension savings an individual could accumulate without incurring an additional tax charge.

The standard LTA applied since 6 April 2006 when it was originally set at £1.5m. It was increased and then capped at £1.8m in 2010/11. It was subsequently reduced three times and is now set at a level of £1.0731 million. The amount of the standard LTA over time is listed in HMRC’s Pensions Tax Manual PTM081000.    

The LTA was abolished from 6 April 2024 but was still in legislation in tax year 2023/24 despite the lifetime allowance tax charge being removed.
 

Benefit crystallisation events

The value of an individual’s pension savings were assessed when retirement benefits are taken (crystallised) and when most death benefits were paid. An event that triggered a test against the lifetime allowance is called a benefit crystallisation event (BCE). This includes taking pension benefits (including flexi-access drawdown or a pension commencement lump sum), reaching age 75, death, or transferring to a qualifying recognised overseas pension scheme. A list of the benefit crystallisation events can be found in HMRC’s Pensions Tax Manual PTM088100. 

When a BCE happens, there was a test against the LTA (if a member has a valid protected LTA the test will be against the higher limit) and if the LTA is exceeded, the excess is subject to tax. During 2023/24 the tax applied was income tax. Prior to that date the tax applied was the lifetime allowance tax charge. Members must have provided confirmation to a scheme administrator of their remaining LTA so the scheme can provide the appropriate tax-free cash.    

For a deceased member, the personal representatives were responsible for establishing if the member had sufficient LTA to cover any pension death benefits. They needed to account for any member records of LTA used during the members lifetime.

The personal representatives are responsible for informing HMRC if any benefits exceeded the deceased’s LTA and who received those death benefits.  

Where pension death benefits exceed the member’s LTA during 2023/24 the recipient was liable to income tax at their marginal rate on their portion of the benefit in excess of the LTA.
 

The lifetime allowance check – valuing benefits

To perform a LTA check, the individual’s pension benefits must have been valued as follows: 

• For benefits paid after 5 April 2006:
  • the value of any tax-free cash (from whatever type of scheme),
  • The amount of fund used to purchase an annuity.
  • The amount of fund designated to drawdown.
  • Where a scheme pension is put into payment from either a defined benefit scheme or from a money purchase scheme, the value of the pension is converted into a capital value by using a factor of 20:1. So, a scheme pension of £15,000 per annum would be valued at £300,000. Sometimes HMRC can agree a higher valuation factor with a scheme administrator in certain circumstances.   
• Pensions in payment prior to 6 April 2006: 

Any pension benefits in payment prior to 6 April 2006 were tested against the LTA at the first BCE event post 6 April 2006. A factor of 25:1 is used to convert each £1 of an individual’s pension in payment at the date of the first crystallisation event. There is no separate accounting for any tax-free cash lump sum taken as this has been allowed for in the factor used.   

If the individual is in receipt of drawdown the value is broadly, 25 x the maximum annual amount that could have been paid as a capped drawdown. In a number of scenarios only 80% of the maximum drawdown income is considered. Full details including a worked example can be found in HMRC’s Pensions Tax Manual PTM088300.

If a member has no other pensions, then all pensions already in payment will never be tested for LTA purposes.  

Each time there was a BCE the scheme administrator must have confirmed the percentage of the individual’s LTA used up so that it can be taken into account at the next BCE. The percentage remains constant even when the amount of the LTA changed over time. 
 

Age 75

For the 2023/24 tax year and earlier, uncrystallised pensions were tested against the LTA when a member reached age 75.

Funds designated to drawdown after 5 April 2006 had a second check against the LTA to check if the drawdown fund has increased in value since the original designation to drawdown. Any increase was counted towards the LTA.

These BCE tests still happened during 2023/24 even though the LTA charge was removed from 6 April 2023. There were no immediate tax implications if any pension benefits exceed the LTA at age 75 for the 2023/24 tax year. Once the benefits were put into payment or lump sums taken then the member became liable to income tax on any excess above the LTA.
 

Low Pension ages

Some pensions have retained a right for members to access their pension benefits before the normal minimum pension age (NMPA), currently 55. Those with a protected retirement age between age 50 and 55 were treated the same as any other benefits for LTA purposes.

When a member with a protected retirement age below age 50 crystallises their benefits before NMPA, they would have their LTA (or protected LTA) reduced by 2.5% for each complete year before the NMPA. 

A reduced LTA would restrict the amount of tax-free cash available.  

Benefits taken at a low pension age are revalued when considering the remaining LTA when other benefits are taken after the NMPA. 
 

Transitional Protections

Some people may have an individual/protected LTA. For details about how these protections work read our briefing. 
 

Example of the lifetime allowance