The Government has confirmed that no one will pay a lifetime allowance tax charge from 6 April 2023 and that the lifetime allowance will be abolished completely from April 2024.
The lifetime allowance is the total value of all pension benefits you have. If the value of your pension benefits when you take them (not including any state retirement pension, pension credit or any partner's or dependant's pension you may be entitled to) is more than the lifetime allowance, or more than any protections you may have (see below), you will have to pay tax on the excess benefits. The lifetime allowance covers any pension benefits you may have in all tax-registered pension arrangements - not just the LGPS.
The lifetime allowance steadily reduced from 2012/13 to 2017/18. From 2018/19 to 2020/21 the lifetime allowance increased each year in line with inflation. The lifetime allowance has been frozen at the 2020/21 rate until its proposed abolishment in April 2024.
The following table provides the lifetime allowance rate each year since 2011:
| Year | Total lifetime allowance |
|---|---|
| 2011/12 | £1.80 million |
| 2012/13 | £1.50 million |
| 2013/14 | £1.50 million |
| 2014/15 | £1.25 million |
| 2015/16 | £1.25 million |
| 2016/17 | £1.00 million |
| 2017/18 | £1.00 million |
| 2018/19 | £1.03 million |
| 2019/20 | £1.055 million |
| 2020/21 | £1.0731 million |
| 2021/22 | £1.0731 million |
| 2022/23 | £1.0731 million |
| 2023/24 | £1.0731 million |
For pensions that start to be drawn on or after 6 April 2006:
The capital value of those pension benefits is calculated by multiplying your pension by 20 and adding any lump sum you draw from the pension scheme.
For pensions already in payment before 6 April 2006:
The capital value of these is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.
When any LGPS benefit (or any other pension arrangement you may have) is put into payment, you use up some of your lifetime allowance. So even if your pensions are small and will not be more than the lifetime allowance, you should keep a record of any pensions you receive. If you have a pension in payment before 6 April 2006, this will be treated as having used up part of your lifetime allowance.
Current Lifetime allowance from 6 April 2023.
If the capital value of your LGPS benefits is more than the lifetime allowance of £1,073,000 you will have to pay tax on the excess. Any excess benefits that are paid as pension will be treated as income and taxed at your marginal tax rate. Any pension commencement lump sum (tax free) lump sum is restricted to a maximum of 25% of the current LTA which currently means that the maximum payable is £268,250.
There are protections called: primary lifetime allowance protection, enhanced protection, fixed protection, fixed protection 2014 and individual protection 2014, fixed protection 2016 and individual protection 2016, if these are still valid and individual may be entitled to a higher lump sum payment.
Find detailed information and examples of how lifetime allowance is calculated at the LGPS member website.