Pension lifetime allowance tests


This briefing sets out how and when benefits are tested against the lifetime allowance (LTA) both in lifetime and on death. 

Core considerations 

  • The LTA is the overall limit on total pension savings an individual can accumulate without suffering an extra tax charge and is currently set at £1.0731 million until April 2026.
  • Benefit crystallisation events occur whenever benefits are taken from a pension and the benefits are tested against the LTA. 
  • Benefit crystallisations events also occur on the payment of certain death benefits and when the client reaches age 75 with benefits not in drawdown. 
  • Each time a benefit crystallisation event occurs the individual uses up a percentage of their LTA.   
  • Where pension benefits exceed the LTA, from 6 April 2023 the LTA charge has been abolished. 



The LTA tests and valuations

A benefit crystallisation event (BCE) occurs when an individual takes benefits from a pension. The key BCEs during a member’s lifetime are taking a pension commencement lump sum (PCLS) also known as tax free cash, designating funds into drawdown, buying an annuity and when first receiving a scheme pension. 

A BCE will also occur on certain death benefits and where the individual has undrawn funds when they reach the age of 75.   

A list of the benefit crystallisation events and a brief overview can be found in HMRC’s Pensions Tax Manual PTM088100

Note that under current proposals most BCE events will be removed from 6 April 2024, leaving only payment of lump sums, lump sum death benefits and QROPS as the remaining BCE events. This aligns with the planned removal of the LTA. 

At each BCE the individual will use up a percentage of their LTA. The amount used is expressed as a percentage of the individual’s LTA, rounded down to two decimal places. Generally, this will be the standard LTA of £1.073m but the individual may have a higher protected LTA, an LTA enhancement or a reduced LTA if taking benefits before the normal minimum pension age (NMPA). 

For example

Patricia has a pension fund worth £600,000. She decides to take £60,000 pension commencement lump sum and move £180,000 into flexi-access drawdown. Technically this creates two separate BCEs, taking the lump sum is BCE6 and moving the funds into drawdown BCE1. The lump sum uses up 5.59% (£60,000/£1.0731m) of the LTA and the drawdown payment 16.77% (£180,000/£1.0731m). The total uses up is 22.36% leaving 77.64% available for future crystallisation.

An individual may crystallise benefits on a number of occasions, so the percentages used are added together at each BCE to check if the individual's LTA has been exceeded. If the cumulative percentage exceeds 100% at a BCE: 

  • Pre-6 April 2023, the amount crystallised above the available allowance was subject to a LTA charge.  
  • From 6 April 2023, the amount crystallised above the available allowance is subject to tax at the member’s marginal rate (or the recipient’s marginal rate for death benefit lump sums). 

The value for LTA purposes is as follows: 

Benefit taken LTA value
Pension commencement lump sum  the amount of lump sum taken 
Lifetime annuity  the funds used to buy the annuity 
Income Drawdown the funds moved into drawdown
Scheme Pension  20 times the initial annual pension 

Normal annual inflationary increases do no trigger further BCEs for annuities or scheme pensions. However, a further BCE may occur if a scheme pension is increased beyond these limits.   

Each time there is a BCE the scheme administrator must confirm the percentage of the individual’s LTA used up so that it can be taken into account at the next BCE. Where multiple BCE’s have occurred at the same time, i.e. taking PCLS and purchasing an annuity, the BCE certificate will typically show the combined percentage used. The percentage remains constant even if the amount of the LTA changes over time. 

Pre 2006 benefits in payment

Benefits that were already in payment pre-6 April 2006 will not have been tested as the LTA did not exist until 6 April 2006. If the member has no other pension benefits, then these will never be tested against the LTA. Where the individual has other uncrystallised benefits, the pre-6 April 2006 benefits in payment are tested against the LTA when the first BCE occurs after 6 April 2006. If the pre-6 April 2006 benefits use up all the LTA when tested, then there is no additional tax charge, but there won’t be any remaining LTA for the benefits that are now crystallising. This could limit or prevent the availability of any PCLS.  

For pre-6 April 2006 drawdown payments, the exact valuation will depend on a number of factors and the dates when the first BCE occurred. Full details including a worked example can be found in HMRC’s Pensions Tax Manual PTM088300.

The age 75 tests

Reaching age 75 is generally the last point at which a BCE occurs. At age 75 there will be a test on any uncrystallised defined contribution benefits and on any undrawn benefits from a defined benefit scheme.  

There is also a test on any funds remaining in drawdown. The test looks at any increase in value of the funds since they were first placed into drawdown. An individual could choose to draw income to ensure the value at age 75 does not exceed the fund originally designated to drawdown, to prevent any further LTA usage. 

Although the benefits are tested at age 75 there is no requirement to bring them into payment under the legislation. They can remain as unused funds indefinitely. However, some scheme rules will require benefits to be taken at age 75 at the latest.   

From 6 April 2023 no LTA charge applies at age 75. Member benefits are still tested against the LTA, and the appropriate BCE certificate issued but there is no immediate tax. Instead, if the member’s LTA has been exceeded then any benefits in excess of the LTA will be taxable at their marginal rate once they are taken.  

Prior to 6 April 2023, if an individual exceeded the LTA due to one of the age 75 tests, then an LTA charge of 25% would have been deducted. 

Post age 75, the only one possible LTA test is where a scheme pension in payment increases by more than the standard increases allowable. 

The LTA tests on death

A BCE will occur on death in certain situations where the member dies under age 75. 

Where benefits have already been tested against the LTA there is no further test on the death benefits. This means there are no further BCE tests on death after age 75, or for funds that are already in drawdown, on scheme pensions in payment or on annuities.   

There are LTA tests on any undrawn pension benefits pre age 75 where they are paid as a lump sum, beneficiary’s drawdown or a survivor’s annuity within two years of notification of the member’s death. If death benefits are paid after two years of notification, there is no LTA test but the funds all become subject to income tax against the recipient, or 45% tax if paid to a non-qualifying person i.e. a trust, rather than being tax free, so in most cases it will be beneficial to ensure death benefits are settled promptly.  

Where a dependant’s scheme pension is paid it is not tested against the LTA but is subject to income tax regardless of the age at the date of death.