The lifetime allowance charge (LAC) arises when a person has a pension scheme (or schemes) with a value of more than the lifetime allowance (LA). If there is a LAC then this gives rise to a tax liability which is paid to HMRC.

A person may be a member of a number of pension schemes and the value of them all may need to be taken into account to determine if the LA has been exceeded or not.

When pension benefits, other than state pensions, are drawn (or start to be drawn) there is a ‘benefit crystallisation event’. At that time it is necessary to check the amount of pension funds crystallising or used against the lifetime limit. If the amount is below the lifetime limit then full benefits can be paid with no additional charge. If a previous ‘benefit crystallisation event’ has used part of the lifetime limit then only the remaining percentage of the lifetime allowance for the current year can be applied.

Rates of lifetime allowance tax charge

The charge is paid on any excess over the lifetime allowance limit. The rate depends on how this excess is paid to the member of the pension scheme. It can be paid as a lump sum or taken as ‘a pension’ in the future.

  • Lump sum rate – 55%
  • Pension rate – 25%

The standard lifetime allowance in force for each tax year from 2006-07:

  • 2006-07                     £1,500,000
  • 2007-08                     £1,600,000
  • 2008-09                     £1,650,000
  • 2009-10                     £1,750,000
  • 2010-11                     £1,800,000
  • 2011-12                     £1,800,000
  • 2012-13                     £1,500,000
  • 2013-14                     £1,500,000
  • 2014-15                     £1,250,000
  • 2015-16                     £1,250,000
  • 2016-17                     £1,000,000
  • 2017-18                     £1,000,000
  • 2018-19                     £1,030,000

 Charge when member is 75 years old

Three ‘benefit crystallisation events’ can occur when a member becomes 75 years old; these events will depend on the type or types of pension the individual has at that point. The three possibilities are:

  • BCE 5   Where a member reaches their 75th birthday under a defined benefit arrangement without having drawn all of their entitlement to a scheme pension and/or lump sum (example 6).
  • BCE 5A Where a member reaches age 75 with a drawdown pension fund or flexi-access drawdown fund (example 7)
  • BCE 5B Where a member reaches 75 under a money purchase arrangement in which there are remaining unused funds (example 8).


On commencing drawdown there is a benefit crystallisation event. At that time tax-free cash can be taken up to 25% of the fund (subject to restrictions if previous benefit crystallisation events have occurred and subject to the lifetime limit being exceeded). The amount of the tax-free cash taken together with the amount transferred to the drawdown pension pot is treated as the amount crystallised.

The amount held in the drawdown pension pot will then be used to pay a ‘pension’ each year. However, there is no minimum pension to take each year, so the member can decide to take no income in any tax year if they so wish. The amounts withdrawn, if any, are often referred to as pension income and the pension scheme will deduct tax under PAYE and will be taxed as income of the member.

For more insight see these worked examples

Article from ACCA In Practice