What Is the Lifetime Allowance and Why Was It Abolished?

The Lifetime Allowance (LTA) was a significant component of the UK’s pension tax regime, acting as a limit on the total value of tax-advantaged pension benefits an individual could accumulate over their lifetime without incurring an additional tax charge. While it regulated pension growth for many years, the LTA was abolished from April 6, 2024. Understanding its function remains important for historical context and for individuals who were subject to its rules prior to its removal, or who need to interpret past pension statements and financial records.

Understanding the Lifetime Allowance

The Lifetime Allowance (LTA) represented a single, overarching limit applied collectively to all of an individual’s registered pension schemes. It differed from the annual allowance, which restricts yearly pension contributions eligible for tax relief. Instead, the LTA was a cumulative limit on the total value of pension wealth built up over an individual’s entire working life. The standard LTA amount was set by the government for each tax year and experienced various adjustments over time, including periods where it was frozen. For instance, it was £1.5 million when introduced in 2006, and £1,073,100 from 2020/21 until its abolition. This limit applied to both defined contribution (money purchase) schemes, where the value is typically the fund size, and defined benefit (final salary) schemes, which provide a guaranteed income.

How the Lifetime Allowance is Measured

The method for valuing pension benefits against the Lifetime Allowance varied depending on the type of scheme. For defined contribution (money purchase) pension schemes, the value was generally straightforward, equating to the total size of the fund when benefits were accessed or at specific assessment points. This included the accumulated contributions and investment growth within the pension pot. Defined benefit (final salary) pension schemes, which promise a specific income in retirement, required a different calculation method. The value for LTA purposes was typically determined by multiplying the annual pension income by 20, and then adding the amount of any tax-free lump sum taken. For example, an annual pension of £25,000 with a £45,000 lump sum would be valued as (£25,000 x 20) + £45,000 = £545,000 against the LTA. Transfers between pension schemes generally did not trigger a new LTA test, but the original event of benefits being taken or assessed would count towards the allowance.

When the Lifetime Allowance is Assessed

The Lifetime Allowance was assessed at specific points in time, known as Benefit Crystallisation Events (BCEs), which typically occurred when pension benefits were accessed or at certain age milestones. There were various BCEs designed to capture different ways individuals could draw or realize value from their pension savings. Each BCE utilized a percentage of the individual’s available LTA, and the cumulative percentage across all events determined if the allowance was exceeded.

• Taking a tax-free lump sum, often referred to as a Pension Commencement Lump Sum.
• Designating funds for income drawdown.
• Purchasing an annuity with pension funds.
• Taking an uncrystallised funds pension lump sum (UFPLS).
• Reaching age 75 with uncrystallised funds or funds already in drawdown.
• Transferring pension benefits to a Qualifying Recognised Overseas Pension Scheme (QROPS).
• Death before age 75 with uncrystallised funds, to assess the value of the death benefits.

Lifetime Allowance Charge

If an individual’s pension benefits exceeded their available Lifetime Allowance at a Benefit Crystallisation Event, a Lifetime Allowance charge was levied on the excess amount. This charge applied specifically to the value above the LTA, not to the entire pension pot. The rate of this charge depended on how the excess benefits were taken. For any excess amount taken as an income, such as being added to a drawdown fund or used to purchase an annuity, a 25% Lifetime Allowance charge was applied. If the excess was taken as a lump sum, the charge was 55%. Pension providers typically deducted this charge before paying out the benefits. From April 6, 2023, the LTA charge itself was removed, with any excess instead taxed at the individual’s marginal income tax rate, as a precursor to the full abolition of the LTA in April 2024.

Available Protections

To mitigate the impact of reductions in the standard Lifetime Allowance over time, various forms of “protection” were introduced, allowing individuals to retain a higher personal LTA. These protections were typically granted based on the value of an individual’s pension savings at specific historical dates. Holding a valid protection meant that an individual’s pension benefits could exceed the standard LTA without incurring the tax charge, or with a reduced charge. Among the most common protections were Individual Protection (IP14 and IP16) and Fixed Protection (FP12, FP14, and FP16). Individual Protection allowed individuals to protect a personal LTA based on the value of their pension savings at a particular date, such as April 5, 2014, or April 5, 2016, with a maximum protected amount. Fixed Protection, on the other hand, set the LTA at a higher fixed amount, but typically required that no further pension contributions or significant benefit accrual occurred after a specific date. Earlier protections like Enhanced Protection and Primary Protection were available for those with very large pension funds prior to “A-Day” (April 6, 2006). Some of these protections continue to influence new lump sum allowances after the LTA’s abolition.