Pensions lifetime allowance explained

Is there a pension lifetime allowance in 2024-25?

The Chancellor announced in the 2023 Budget that the lifetime allowance had been abolished, although some protections remain in place.

Previously, you could save as much as you wanted into a pension, but if it exceeded a total amount (the lifetime allowance), you could be hit with a hefty tax charge.

In 2022-23, the lifetime allowance was £1.073m. 

The chart below shows the history of the lifetime allowance before it was abolished.

From 2018/19, the lifetime allowance increased every year by inflation (as measured by the Consumer Prices Index rate the previous September).

In September 2019, inflation stood at 1.7%. That meant that the lifetime allowance in the 2020-21 increased to £1,073,100.

In the 2021 Budget, the allowance was frozen at that amount.

What was the pension lifetime allowance charge?

Any amount you had in your pension above the lifetime allowance was subject to a tax charge.

It was a one-off charge of 25% if paid as pension (meaning that you buy an annuity or take a regular income through a drawdown plan), or 55% if paid as a lump sum.

The charge was applied in either of the two ways or a combination of both depending on how you took the excess benefits above the lifetime allowance.

Protecting your pension lifetime allowance

You can still apply for 'protection' from the previous reductions in the lifetime allowance, which was available to you in recognition that you were saving into your pension with a higher allowance in mind.

There are two types of protection you can still apply for (for previous tax years) which have replaced previous versions:

Individual protection 2016

You can apply for individual protection 2016 if your pension or pensions were worth more than £1m at 5 April 2016.

This protects your lifetime allowance at the value of your pensions on 5 April 2016 or £1.25m, whichever is the lowest.

Fixed protection 2016

Fixed protection 2016 fixes your lifetime allowance at £1.25m, but you can no longer contribute to your pension. This tends to be the right option for people who no longer want or need to save into a pension any more.

If you do put money into a pension once you have fixed protection, you'll lose it and will have to pay a tax charge on the excess.

Protected tax-free lump sums

From 6 April 2023, the amount of tax-free lump sum you can take is 25% of your pension pot, up to a maximum of 25% of the 2022-23 standard lifetime allowance (£268,275). 

If you hold certain lifetime allowance protections, the amount of tax-free lump sum you can take may be higher than £268,275. 

Fixed protections and lump sums

If you hold valid:

• fixed protection, you are entitled to a tax-free lump sum of up to £450,000
• fixed protection 2014, you are entitled to a tax-free lump sum of up to £375,000
• fixed protection 2016, you are entitled to a tax-free lump sum of up to £312,500 

Individual protections and lump sums

If you hold valid individual protection 2014, you applied for your lifetime allowance to be protected at either: 

• the lower of the value of all of your pension pots on the 5 April 2014
• £1,500,000

You will be entitled to a tax-free lump sum of 25% of your protected lifetime allowance.

For example, if you hold individual protection 2014 at £1,400,000, you’ll have an increased tax-free lump sum of £350,000.

If you hold valid individual protection 2016, you applied for your lifetime allowance to be protected at the lower of the value of all of your pension pots on the 5 April 2016 or £1,250,000. 

You will be entitled to a tax-free lump sum of 25% of your protected lifetime allowance or 25% of the standard lifetime allowance, whichever is higher. 

How do I apply for lifetime allowance protection?

You can still apply for either individual protection or fixed protection through the government's website