Lifetime Allowance for private pensions in 2022

8 December 2022 by Robin - 8 minutes of reading time

lifetime allowance in 2022

What is the lifetime allowance? Can I protect mine from being reduced? Is my pension pot affected? You may have to pay tax on your private pension. However, you may not pay tax for money in your private pension as long as it is below the lifetime allowance. Your Benefits will tell you everything you need to know your lifetime allowance. 

What is the lifetime allowance?

This is the amount of money you can accumulate in your pension pot before having to pay taxes. If you go over it, you will pay tax on your pension. In 2022, the standard lifetime allowance is £1,073,100.

Overtime, this may get reduced. However, you could be able to protect your pension pot from decreases of the lifetime allowance.

If you chose to protect your lifetime allowance, you will also need to have certain conditions apply to you. For example, if you adhere to another scheme or a workplace pension, you will likely lose your protection.

Additionally, the amount of money that you have in your pension pot may be over your lifetime allowance. In this case, you will need to pay tax on payments. More specifically, this depends on how you take your money out. The table below will give you more information about this.

Am I over my lifetime allowance?

What is the lifetime allowance?

You can check if you reached your lifetime allowance. In order to do this, ask your pension provider. They will be able to tell you. Additionally, you may be in multiple pension schemes. Then, ask each of your provider. Then, add all the amounts that you have in all your pension pots. 

There are two different types of pension pots. Then, this will change what gets counted towards your lifetime allowance. First are defined benefits. This includes a number of workplace pension schemes. Then, typically, what counts is typically 20 times the amount that you receive in the first year, on top of any lump sum.

Second, there are defined contribution pensions. These are typically personal pensions, stakeholder pensions and a number of workplace pensions. Then, what counts towards your lifetime allowance is the money in the pot that is meant to go to you when you collect the money. In fact, this is regardless of the way in which you collect payments.

Your provider may ask for details about your other pensions. Why that is is so they can check if you are over the lifetime allowance. In fact, this will be important for when you turn 75 years old, choose to take money out or transfer your pot to a country abroad.

What happens if you go over the pension lifetime allowance?

If your pension pot is over the lifetime allowance, you will need to pay tax. Then, you will receive a statement, sent by your pension provider. More specifically, this will tell you how much tax you will need to pay.

If you need to pay tax on your pension pot. Then, your pension provider will take out the tax from your pension payments, prior to you receiving them. However, you will need to complete a Self Assessment tax return. If you use paper forms, download and fill form SA101.

You may pass away prior to being able to money out of your pension pot. If that is the case, His Majesty’s Revenue and Customs (HMRC) will ask for the inheritor of your pension to pay the necessary tax. 

Lifetime allowance tax rates in 2022

There are certain tax rates that you will need to pay if you go over your lifetime allowance. In fact, this is once your pension pot is over the lifetime allowance. Furthermore, your tax rate depends on how you decided to take out money from your pension pot. The lifetime allowance tax rates in 2022 are as follows:

Tax rates for pension pots over the lifetime allowance in 2022
Tax rate for pension savings over the lifetime allowance How you withdraw the money
55% If you withdraw money from your pot as a lump sum
25% If you withdraw money in any other way

If your pension pot is below the lifetime allowance, you will not have to pay tax. However, you will need to start paying tax once the money in your pension pot is over this limit.

How can I protect my lifetime allowance?

How can I protect my lifetime allowance?

There was a decrease in the lifetime allowance. More specifically, this happened in April 2016. Additionally, you may decide to protect your allowance. To do this, you will need to provide certain things to your provider when withdrawing money from your pot. More specifically, the type and reference number of your protection.

You may not be able to withdraw money from your pension pot. This is true if you have a defined contribution pension pot. Then, you could not be able to withdraw uncrystallised funds pension lump sums. This is true if one of the following applies:

  • You have lifetime allowance enhancement factor, and the allowance that you did not use is fewer than 25% of the money you want to take out;
  • You have enhanced or primary protection for your lifetime allowance which applies to a lump sum superior to £375,000.

Additionally, there could be a change in your circumstance. Then, you could need to tell HMRC. Then, you may lose either fixed or enhanced protection. This is the case if you:

  • Have fixed protection, and how much is in your pension pot increases within a tax year more than what the tax rules allow, which is referred to as ‘benefit accrual’;
  • Have enhanced protection, and when getting pension benefits, what you get is superior to the enhanced protection tax rules, which is also called ‘relevant benefit accrual’;
  • Do not respect the transfer rules when moving money from one pension scheme to another;
  • Adhere to another workplace pension scheme;
  • Get savings (not previously there) in your pension scheme.

One of the conditions above may apply to your situation. If this is the case, you need to report the changes. You can do this online or by post.

What if my employer enrolled me in a workplace pension?

Note that your employer may choose to enrol you in a workplace pension scheme. However, if that is the case, and your lifetime allowance is protected, you will lose your protection. Then, to keep your protection, you can do one of two things.

First, you can ask your employer not to be automatically enrolled. However, note that you may need to provide proof that you protected your lifetime allowance to your employer.
Second, you may opt-out of the workplace pension scheme. In fact, you can do this no later than one month after you were included in the scheme. Lastly, if you believed that you lost your pension, you can notify His Majesty’s Revenue and Customs (HMRC) in writing.

What if I lost my protection?

You may have lost your lifetime allowance protection. If that is the case, you will need to let His Majesty’s Revenue and Customs (HMRC) in writing. In fact, you will need to indicate a number of things.

First, you need to indicate your National Insurance number, address and your name. Second, the date on which you lost your lifetime allowance protection. Third, why you do not have your protection anymore. This could be because you were automatically enrolled, or benefit accrual.

Fourth, you need to indicate what the type of pension that you have is. This could be either defined benefit or defined contributions. Lastly, you will need to include your certificate. This is if you still have the documents. However, note that if you got IP2016, or FP2016, they were not issued with them.

You can contact HMRC by post or phone. If you need to send documents, you will need to do so by post. To contact HMRC by phone, you can call 0300 123 1079. If you need to contact them by post, you need to send the letter and documents to the following address:

Pension Schemes Services
HM Revenue and Customs
United Kingdom

What is my lifetime allowance if I can withdraw money before 50?

Your lifetime allowance may be reduced. More specifically, this could be the case if you can withdraw money from your pension pot before turning 50 years old. Furthermore, this needs to be for a pension scheme that you adhered to prior to 2006

However, this is only true for people with specific jobs. Additionally, these people need to have started to take money out of their pension prior to turning 55 years old. Some of the jobs are the following:

  • Wrestlers;
  • Tennis players;
  • Squash players;
  • Skiers;
  • Models;
  • Golfers;
  • Ice hockey players;
  • Dancers;
  • Cyclists;
  • Boxers;
  • Athletes.

These are not the only jobs for this. However, they are some of the jobs for which it applies. Additionally, you could be in a pension scheme for uniformed services. For example, this includes people working in the police, armed forces and fire service.

What else should I know?

You do not need to pay a tax charge to be eligible for the state pension. This is also the of the lifetime allowance charge, applying for individual protection 2016. If it exceeds the lifetime paid as a lump sum, you may be registered for a lump sum. A financial adviser may help you applying for protection. Pension savings are also the total amount as registered pension schemes.

Robin is a writer for Your Benefits, writing about aids that people may be entitled to. He is currently working on his Master in journalism at the Institut Supérieur de Formation au Journalisme in Lille.

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