Your lifetime allowance

The Government has announced that no one will pay a lifetime allowance tax charge from 6 April 2023. If a tax charge arose before this date, it is still payable. The lifetime allowance will be abolished entirely from 6 April 2024.

Before 6 April 2023, if the value of your pension benefits when you took them was more than the lifetime allowance, or more than any protections you held, you had to pay tax on the excess benefits. This did not include any state pension, state pension credit or any partner’s or dependant’s pension you are entitled to.

The lifetime allowance covered your pension benefits in all tax-registered pension arrangements – not just the LGPS.

The allowance has changed over the years. If you want to know what the rates were in previous years please read https://www.lgpsmember.org/your-pension/the-essentials/tax/#the-lifetime-allowance on the LGPS website.

If your tax charge arose before April 2024, it is still payable. Please carry on reading only if you have a tax charge payable.

How the lifetime allowance is calculated

For pensions that start to be taken on or after 6 April 2006

The capital value of those pension benefits is calculated by multiplying your annual pension by 20 and adding any lump sum you take from the pension scheme. 

When you start taking your pension, the capital value of the benefits you are taking is expressed as a percentage of the lifetime allowance limit. 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.

For pensions that started to be taken before 6 April 2006

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.

Lifetime allowance protection

Individual Protection 2016 (IP2016)

You can apply for IP2016 if your pension savings were valued at over £1 million (including pensions already in payment) on 5 April 2016. However, if you have primary protection you can’t apply for IP2016.

IP2016 gives a protected lifetime allowance equal to the value of your pension rights on 5 April 2016 - up to a maximum of £1.25 million. You will not lose IP2016 by making further savings in your pension scheme, but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.

Fixed Protection 2016 (FP2016)

You can apply for FP2016 if you expect your pension savings to be more than £1 million (including

pensions already in payment) when you come to take them on or after 6 April 2016. FP2016 can

be used to reduce or mitigate the lifetime allowance charge.

For more information please read the fact sheet at the bottom of this page.  To apply for protection, visit the GOV.UK website.

Paying a tax charge for exceeding the lifetime allowance

If your pension capital value exceeds the lifetime allowance, you will have to pay a tax charge.

The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you - the rate is:

• 55% if you get it as a lump sum
• 25% if you get it any other way, for example, pension payments or cash withdrawals.

You can then choose to pay the tax charge:

• immediately by a reduction to your lump sum
• directly to HMRC yourself
• ask the scheme to pay the charge for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit. 

Further information and guidance

Learn more about tax on your private pension contributions on the GOV.UK website.

Contact Pension Services for help with your Oxfordshire Pension Fund scheme.