How is the Lifetime Allowance calculated?

Each time you take payment of a pension benefit, the capital value of the benefits you are taking uses up a percentage of your lifetime allowance. Even if your pensions are small, you should keep a record of every pension you receive.

 

The capital value of pensions that you take after 5 April 2006 is your annual pension multiplied by 20, plus any lump sum you take from the pension scheme. If you have a pension that was first paid before 6 April 2006, this will also be treated as using up part of your lifetime allowance. For these pensions, the capital value is the current annual pension multiplied by 25. Any lump sum you received is ignored.

 

Before 6 April 2023, when you took your benefits, if the capital value of those benefits was more than your available lifetime allowance, you had to pay tax on the excess. If your excess benefits were paid as a pension, the tax charge was 25% of the excess. The ongoing pension payments were also subject to income tax. If you took the excess benefits as a lump sum, they were taxed once at 55%.

 

You could choose to pay the tax immediately by a reduction to your lump sum, pay the tax directly to HMRC yourself or ask the scheme to pay the tax for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit.