The lifetime allowance explained
Lifetime allowance is the amount of pension savings an individual can make over a working lifetime without paying tax. 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. If an individual’s total pension savings exceed the lifetime allowance, a tax charge is due on the excess benefits.
The lifetime allowance is currently £1,073,100 and will remain at this figure until April 2026.
The lifetime allowance charge
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.
The rate of tax payable on any excess benefits above lifetime allowance depends on how the member receives the benefits.
- Benefits taken as a cash lump sum are taxed at a rate of 55 per cent.
- Benefits that are paid as a pension are taxed at a rate of 25 per cent.
NHS Pensions will deduct the lifetime allowance tax charge from the member’s pension before it is paid. Regular pension payments in retirement will continue to be taxed according to the individual’s marginal rate of income tax. Therefore, for higher rate tax payers, both the options above are broadly equivalent.
How benefits in the NHS Pension Scheme are tested against lifetime allowance
The value of the member’s annual pension at retirement is multiplied by a factor of 20.
The value of any automatic additional cash lump sum (for members of the 1995 Section only) is added.
The value of any additional voluntary contributions (AVCs) is added.
Individuals will need to add the value of any other pension benefits from other pension schemes in this calculation.
If the total pension savings exceed the lifetime allowance, any excess benefits are subject to a tax charge.
Those likely to be affected
A range of factors will contribute towards an NHS Pension Scheme member exceeding the lifetime allowance. Members are more likely to breach the lifetime allowance if they have:
- a high income
- long service in the 1995 Section and are active members of the 2015 Scheme
- pension benefits in other schemes.
The table below shows example combinations of the final pensionable pay figures and length of service which may be sufficient to reach the lifetime allowance of £1,073,100, based on their service in the 1995 section.
NHS Pension Scheme 1995 Section*
|Length of service||Final pensionable pay||Annual pension||Additional retirements cash lump sum||Value of pension savings|
At this point in time, it is unlikely that individuals who have only had membership in the 2015 Scheme, or who have membership in the 2015 Scheme and the 2008 Section*, will have sufficient service to reach the lifetime allowance, based on these benefits alone. It is possible that these members may breach the lifetime allowance once their benefits from other workplace pension schemes and personal pension arrangements are considered.
It is more likely for members of the 2015 Scheme to breach the lifetime allowance if they also have long service in the 1995 section of the scheme.
*The NHS Pension Scheme is divided into three parts; the 1995 Section, 2008 Section and 2015 Scheme. This video on the NHS Pensions website may help staff work out which parts of the scheme they have membership in. Our web page provides a comparison of key elements of all three schemes.
Pension benefits are measured against the lifetime allowance at retirement. At that time, NHS Pensions will confirm if the member has exceeded the lifetime allowance and if a tax charge is due.
Raising awareness of the lifetime allowance may encourage members to engage with their pension savings earlier. If members have a good understanding of how the lifetime allowance works, they are more likely to make informed decisions and take proactive steps to mitigate a tax charge on retirement.
The best way for members to monitor the growth of their NHS Pension is to view their annual Total Reward Statement (TRS). It’s important for individuals to view their TRS alongside annual benefit statements from other workplace and personal pension schemes to identify the total value of their pension benefits.
Options for affected NHS Pension Scheme members
Individuals with pension benefits that are approaching the lifetime allowance value may wish to discuss their options with an independent financial adviser, to ensure they make an informed decision to suit their financial circumstances.
Members may be able to apply to HMRC to protect the value of their pension savings, or take steps to reduce the value of their pension benefits at retirement before they are measured against the lifetime allowance.
Lifetime allowance protection
Members may have protected their pension savings from the 6 April 2016 reduction of the standard lifetime allowance, which was when the lifetime allowance was reduced from £1,250,000 to £1,000,000. More information about this protection is available on the HMRC website. Members with this protection that moved from the 1995/2008 Scheme to the 2015 Scheme on 1 April 2022 as part of the McCloud remedy will have lost their protection. Further information about this can be found on the NHS Pensions website.
Options available to NHS Pension Scheme members who are approaching the lifetime allowance include:
Members have the option to take a lower pension in exchange for a cash lump sum on retirement.
Taking benefits from the scheme stops further build-up of pension savings and if benefits are taken before normal retirement age, the pension is normally lower to reflect the early payment.
Members can request to retire, claim their pension benefits and then return to NHS employment. The Department of Health and Social Care has released guidance to help employers put policies in place to consider applications from staff.
Our flexible retirement web page explains the options available, including retire and return, and provides examples of each in practice.
Members of the scheme can, subject to certain conditions, choose to take a lower pension and allocate part of their pension to be paid to another person after their death.
Access further information about lifetime allowance
The Money Advice Service is set up by government to provide impartial money advice. Their website has further details on pensions and retirement, including a directory of regulated advisers.
Information about annual allowance
Annual allowance is the amount of pension savings an individual can make in one year without paying tax. If an employee builds up pension savings that exceed the annual allowance, a tax charge is due on the value of the excess benefits.
Visit our web page for more information on the annual allowance and how to support members of the NHS Pension Scheme that are likely to be affected by it.