What was the Lifetime Allowance and what did it mean for your pension?

The Lifetime Allowance charge was abolished on 6 April 2023. This was announced in the Spring Budget of 2023 in a bid by the Government to incentivise retirees to return to the workplace.  

However, if you’re still interested in reading up on this rule, we’ve laid out how it worked below.

The Lifetime Allowance was the maximum amount you could save into your pension without incurring an excess tax charge.

You could save more than the £1,073,100 allowance into your retirement fund, however, this excess would have been liable for a tax charge.

The Labour party has pledged to reintroduce the Lifetime Allowance if they come into power, but besides this statement there isn’t any evidence to suggest the Tories will reimplement the scheme anytime soon.

If it does return, make sure to visit the Moneyfactscompare.co.uk site to stay updated with the latest information.

It’s important to remember that pension withdrawals aren’t tax-free. This is still classed as income and if you exceed your annual personal income tax allowance then 75% of your withdrawal is taxable in the same way as income from employment.

Previously, a Lifetime Allowance Test occurred each time you accessed your pension and at age 75 regardless, if you were taking any pension benefits. The charge ultimately depended on how your funds were withdrawn. A lump sum withdrawal was subject to a 55% tax while an income withdrawal incurred a 25% charge.

This means that, for income withdrawals, if you exceeded your income tax allowance you would pay both income tax as well as the 25% charge if you exceeded the Lifetime Allowance.   

Some pensioners are on a final salary scheme, or a defined benefit pension scheme. If this is the case, then working out your Lifetime Allowance was different.

For defined benefit pension schemes you would multiply your expected annual pension by 20 and add the value of any tax-free lump sum amounts you expected to receive. This total figure would be used towards the Lifetime Allowance threshold and, if it exceeded the figure, then the lump sum or withdrawal charges would be applied appropriately.

Before April 2016, the Lifetime Allowance was set at £1.25 million. So, to help those who had structured their retirement plan around this allowance, the Government introduced the Fixed Protection 2016 and Individual Protection 2016 schemes.

This meant, depending on your circumstances, you could apply for one of these protections and see your Lifetime Allowance raised to £1.25 million.

However, doing so came with certain caveats, which are explained in more detail below.

This protection was only available for those who had more than £1 million in savings on 5 April 2016, the day before the Lifetime Allowance cut came into effect.

Under this scheme pensioners would have their unique Lifetime Allowance which would be the value of their pension on 5 April 2016 or £1.25 million, whichever was lower.

Importantly, you were still able to add to your retirement fund if you opted in for this protection. Anything else would be subject to the Lifetime Allowance charge.

Otherwise, the Fixed Protection 2016 fixed the Lifetime Allowance at £1.25 million. Importantly, those who applied for this scheme couldn’t add to their pension without losing the protection. If this happened, then you would either lose your fixed protection allowance or pay tax on the excess which exceeded the standard Lifetime Allowance. 

In order to apply for the fixed protection 2016 scheme you had to:

• Not have added to your pension and opted out of your workplace scheme by 5 April 2016
• Not benefit from enhanced protection, primary protection, fixed protection, or fixed protection 2014.