Article

Lifetime allowance

Details of what a lifetime allowance is, what the current rate is and how it differs from the annual allowance.

8 March 2021

Lifetime allowance is the total amount that an individual can have in all their pension savings, during their lifetime, without incurring a tax charge.

Lifetime allowance

The lifetime allowance is the total amount that an individual can have in all their pension savings, during their lifetime, without incurring a tax charge. All pension benefits, except the state pension, count towards the lifetime allowance. This includes pension benefits in the NHS Pension Scheme, other workplace pension schemes and personal pension arrangements.

The lifetime allowance is currently £1,073,100 and will remain at this figure until April 2026.

If an individual’s total pension savings exceed the lifetime allowance, a tax charge may be incurred on any benefits in excess of the allowance. NHS Pensions will deduct any lifetime allowance tax charges from the member's pension before it is paid.

Staff that are most likely to breach the lifetime allowance and may be at risk of a lifetime allowance tax charge at retirement are those with:

  • high incomes
  • long service in the 1995 Section
  • pension benefits in other schemes.

Take a look at our lifetime allowance briefing for key information on who is likely to be affected by lifetime allowance and options for affected staff. The briefing includes information on the rate of tax charge, staff who are likely to be affected and what happens if lifetime allowance is breached.

How does lifetime allowance tax charge differ from an annual allowance tax charge?

Lifetime allowance

  • The lifetime allowance is £1,073,100 until April 2026.
  • An individual that is presented with a lifetime allowance tax charge is not expected to meet this charge until they are paid their benefits in retirement.
How are benefits in the NHS pension scheme tested against lifetime allowance?
  • multiply the member’s annual pension at retirement by 20
  • add the value of any additional cash lamp sum (1995 members only)
  • add the value of any additional voluntary contributions.
  • Individuals will need to add the value of any other pension benefits from other pension schemes in this calculation.
  • Lifetime allowance tax charge is covered by NHS pensions by deducting this from the member’s pension before it is paid.

Annual Allowance

  • The standard annual allowance is currently £40,000 for 2020/21.
  • Our handy infographic sets out the key dates and actions in relation to annual allowance during each tax year and how an individual can pay their tax charge.
How are benefits in the NHS pension scheme tested against annual allowance?
  • subtract the value of the member’s pension at the start of the year from the value of the pension at the end of the year
  • the value of pension growth is multiplied by a factor of 16
  • the resulting figure is the Pension Input Amount (PIA).
  • If the PIA exceeds the individual’s annual allowance, any excess benefits are subject to a tax charge.
  • Staff affected by annual allowance can choose to pay their tax charge by using the scheme pays facility, carrying forward unused annual allowance from previous years or paying the charge from their own funds or savings.

Take a look at paying an annual allowance tax charge article for more information.