NHS pension lifetime allowance

Our guidance offers everything you need to know about your NHS pension lifetime allowance. The BMA can help you to make the best decisions with your pension and reduce your potential tax charge – give us a call.
Location: UK
Audience: All doctors
Updated: Friday 1 May 2020
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The lifetime allowance is currently £1.0731 million.

This is the maximum amount of pension saving you can have without incurring a tax charge. This applies to your entire pension saving excluding the state pension.

The tax charge represents a clawing back of some of the tax relief which you have received during the build up of your pension benefits.

The lifetime allowance amount has changed over time.

 

How your lifetime allowance is calculated

Your pension x 20 + lump sum = capital value

Lifetime allowance is tested against the pension and lump sum amounts that you are going to receive:

  • after any commutation of pension to provide optional lump sum
  • after allocation
  • after the application of actuarial reduction
  • after the application of a pension debit (on divorce)
  • after any deduction made for utilising the scheme pays facility
  • after adding any added years or additional pension purchase. 

You will also need to include any other pension benefits from other occupational or personal pension arrangements.

The state pension is not included.

When can I be charged?

If your pension benefits exceed the allowance then a tax charge will apply.

The charge is applied on the excess benefits only.

The charge is 25% if the excess is taken as scheme pension and 55% if the excess is taken as a lump sum.

 

Paying the lifetime allowance tax charge

The charge will usually be against your annual pension.

The charge is 25% on the excess of your pension. It is then divided by an age related actuarial factor, and your NHS pension is reduced by this amount.

You are not required to meet the charge before the payment of your benefits.

An example using an age-related actuarial factor of 20 of how the charge is calculated:

Annual pension £52,000
Lump sum £156,000
Capital value £1.196m ((20 x £52,000) + £156,000)
Excess fund £122,900 (£1.0731m - £1.196m)
The tax charge payable £30,725 (£122,900 X 25%)
Reduction to pension £1,536.25 (£30,725/20*)
Reduction pension payable £50,463.75 (£52,000 - £1,536.25)

Taking a bigger tax-free lump sum

Commuting pension to within the maximum tax-free lump sum allowable, which is 25% of the standard lifetime allowance or your HMRC protected amount, will reduce the capital value of benefits. This can help reduce your lifetime allowance charge, even if you are unable to reduce the capital value of your benefits to within the threshold.

Read our calculating your pension lump sum guidance.

Using the figures from the example above if, instead of taking the standard benefits, you claim the maximum tax-free lump sum based on 25% of the standard lifetime allowance you would receive an enhanced lump sum of £268,272 and a reduced pension of £42,644.

Annual pension £42,644
Lump sum £268,272
Capital value £1,121,152 ((20* x £42,644) + £268,272)
Excess fund £48,052 (£1,121,152 - £1,073,100)
The tax charge payable £12,031 (£48,052 X 25%)
Reduction to pension £600.65 (£12,013/20*)
Reduced pension payable £42,043.35 (£42,644 - £600.65)

Taking a bigger lump sum

Commuting pension to lump sum will reduce the capital value of benefits and can help reduce your lifetime allowance charge, even if you are unable to reduce the capital value of your benefits to within the threshold.

Using the figures from the example above if, instead of taking the standard benefits, you claim the maximum lump sum this would give an enhanced lump sum of £278,568 and a reduced pension of £41,786.

Annual pension £41,786
Lump sum £278,568
Capital value £1,114,288 ((20* x £41,786) + £278,568)
Excess fund £41,188 (£1,114,288 - £1,073,100)
The tax charge payable on the excess lump sum £5,661.15 (£10,293 (£278,568 - £268,275) X 55%)
Reduced lump sum payable £272,906.85 (£278,568 - £5,661.15)
A further tax charge payable on the excess pension £7,723.75 ((£41,188 - £10,293) X 25%)
Reduction to pension £386.19 (£7,723.75/20*)
Reduced pension payable £41,399.81 (£41,786 - £386.19)

Ways to reduce your lifetime allowance tax charge

  • Take a bigger lump sum (as detailed above). 
  • Allocate part of your pension to a dependent - this reduces the amount of pension you receive at retirement.
  • If you have the option to retire early with actuarially reduced benefits, this will reduce your capital value and therefore tax charge.
  • If you divorce and are subject to a pension sharing order, the capital value is calculated after the debit has been deducted at retirement.
  • If you pay an annual allowance tax charge via the scheme pays facility, the capital value is calculated after the deduction has been made.
  • You may wish to opt out of NHS pension scheme membership to stop further pension accruing – you should consider your loss of life assurance, redundancy and preferential ill health retirement arrangement.

 

Enhanced protection

Enhanced protection allows for all of your pension benefits to be protected from the lifetime allowance charge. This is irrespective of the size of the pension saving at retirement providing the benefits have not increased by more than a set rate between 6 April 2006 and your retirement date.

The rate of growth of your benefits is subject to a test known as the RBA (relevant benefit accrual) test.

Enhanced protection may be lost if, after 5 April 2006 you have:

  • paid a contribution to a money purchase pension arrangement (personal pension plan, AVCs (additional voluntary contributions), etc
  • built up further benefits in the NHS pension scheme that exceed the RBA
  • built up new benefits in a defined benefit scheme (other than the NHS pension scheme) or in a cash balance pension scheme, above the RBA
  • joined a new pension scheme - unless you are only transferring pension savings from one of your existing schemes into the new scheme
  • start saving in a new pension arrangement (including the 2015 scheme). 

Enhanced protection does not increase the available tax free lump sum but you are permitted to access the lower of:

  • 25% of £1.5 million, or
  • 25% of the capital value of the benefits paid. 

Read more about previous HMRC protection arrangements when the lifetime allowance threshold has been reduced.

 

Fixed protection

Fixed protection recognised that you may expect to have pension savings of more than the standard lifetime allowance in 2012, 2014 and 2016.

You can't give up fixed protection but from 5 April 2012 (FP 2012), 5 April 2014 (FP 2014) or 5 April 2016 (FP 2016) you will lose your protection if you:

  • paid a contribution to a money purchase pension arrangement (personal pension plan, AVCs etc)
  • built up further benefits in the NHS pension scheme that exceeds 'benefit accrual'
  • built up new benefits in a defined benefit scheme (other than the NHS pension scheme) or in a cash balance pension scheme above benefit accrual
  • join a new pension scheme - unless you are only transferring pension savings from one of your existing schemes into the new scheme start saving in a new pension arrangement (including the 2015 scheme). 

If you lose fixed protection you will revert to the standard lifetime allowance.

You may be allowed to apply for fixed or individual protection 2016.

Read more about previous HMRC protection arrangements when the lifetime allowance threshold has been reduced.

 

Benefit accrual

If you have a certificate of fixed protection you must test for benefit accrual. This is your responsibility and the pensions agencies will not do this for you.

Benefit accrual will occur if the capital value of your benefits increases by more than the 'relevant percentage' at any time during the tax year.

You need to calculate the capital value of your benefits at the start of each tax year. If you have reason to believe that you have significant growth in benefits after then, you need to test for benefit accrual. This means that you could be testing fairly frequently during the tax year or you may risk a fine.

If you are automatically enrolled into the NHS pension scheme as a result of auto enrolment then you have one month to opt out again to avoid losing your protection.

Read more about benefit accrual at GOV.UK

 

Individual protection

Individual protection was first introduced in 2014. It enabled individuals who already had pension saving more than the reduced lifetime allowance to keep that amount, but not more than the previous lifetime allowance amount.

Individual protection 2014 enabled you to retain a personal allowance of between £1.25 million and £1.5 million after 5 April 2014. Individual protection 2016 enables you to retain a personal allowance of between £1m and £1.25m.

You can apply for individual protection 2016 if the capital value of your benefits on 5 April 2016 was more than £1 million.

You must request a valuation of your benefits on 5 April 2016:

Apply for individual protection at HMRC

 

Joining the 2015 scheme

If you hold enhanced protection, fixed protection 2014 or fixed protection 2016 (acquired before joining the 2015 scheme) your protection will be lost when you join the 2015 NHS pension scheme.

If you apply for fixed protection 2016 after you have joined the 2015 scheme this will not be lost unless benefit accrual occurs.