The lifetime allowance is currently £1,073,100 for the 2023/24 tax year. This doesn’t mean you’re unable to save above this amount, there’s no upper or lower cap for how much money you can have in your pensions. However in 2023/24, any amount over the lifetime allowance will be taxed as income at your marginal tax rate. It has been announced by the Government that the lifetime allowance will be removed entirely in 2024/25 and replaced by an upper limit on how much tax-free cash you can withdraw, which is expected to be £268,275.
Lifetime allowance table
| 2020/21 | 2021/22 | 2022/23 | 2023/24 |
|---|---|---|---|
| £1,073,100 | £1,073,100 | £1,073,100 | £1,073,100 |
The lifetime allowance applies to all of the personal or workplace pensions you have, including defined benefit pensions and defined contribution pensions. It does not, however, include your State Pension allowance.
How to calculate lifetime allowance
When you start drawing down your pension, the value of your withdrawals will be deducted from your lifetime allowance and should be clearly marked on your statements. While the lifetime allowance won’t affect everyone, it’s worth calculating the expected value of your withdrawals in retirement to avoid any potential charges. It’s especially valuable to do so if you’ve built up a sizeable pension pot.
Defined contribution pensions: most people will have a defined contribution pension which will be valued based on how much money they’ve paid in and how their investments have performed. It’s this value that will be checked against your lifetime allowance each time you take money out of your pension.
Defined benefit pensions: if you have a defined benefit pension, or final salary pension, the value will be based on your salary and the number of years you’ve worked for your employer. If you have a defined benefit pension you can calculate the total value by multiplying your expected annual pension by 20. If you’re eligible to receive a tax-free lump sum it would also need to be included in this calculation.
Lifetime allowance charge
From the 2023/24 tax year, the Lifetime allowance charge has been abolished and you’ll instead pay income tax charged at your marginal rate on any payments above the lifetime allowance. From the 2024/25 tax year, the lifetime allowance will be fully abolished through a future Finance Bill.
About PensionBee
If you think the value of your pensions is approaching the lifetime allowance you should consider taking action. PensionBee can help you calculate how much your pensions are worth, as once you’ve found any old workplace pensions we can help you consolidate these together with a pension provider name and ideally the policy number too. This will give you much greater clarity over what you have saved. Sign up to PensionBee today and combine your pensions into one simple plan that you can easily manage online.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 28-11-2022
