Ask Money: could you enlighten me on the lifetime allowance?

Steven Cameron of Aegon helps a readers with a pensions query.

January 6, 2020

I am a regular subscriber to Money Observer and have been for a number of years. I find your information and factual data extremely helpful.

I have a Sipp, and I supplement the state pension and some other income with annual small uncrystallised lump-sum payments (UFPLS), typically of 3-4% a year, usually with the aim of using up my full basic-rate tax allowance. I think I understand the situation regarding the lifetime allowance for such withdrawals.

I’m a few years shy of 75, but I’m slowly realising that the situation at that point, when an accumulation of earlier annual withdrawals is factored in, will become rather more complicated. My efforts at finding a written explanation of the situation have not been very successful, so I am hoping that one of your excellent experts could clarify it for me, preferably using words that those with only a passing understanding of pension legislation terminology can follow.
Name and email address supplied

Steven Cameron, pensions director at Aegon, replies: Taking an uncrystallised funds pension lump sum (UFPLS) from a pension before reaching age 75 is known as a benefit crystallisation event (BCE). Each such event requires the payment to be tested against your lifetime allowance, which is the maximum benefits you can take before you have to pay a tax charge. A lifetime allowance charge only applies when the benefits being taken, plus any taken previously, exceed your lifetime allowance. Currently, the lifetime allowance is £1,055,000.

Each UFPLS taken before the age of 75 uses up part of your lifetime allowance. Your pension scheme/provider will provide a statement showing how much of your lifetime allowance has been used up by the UFPLS or other type of benefit taken.

In the example in the box above, the three UFPLS payments taken have used up a total 11.68% of the person’s lifetime allowance. This leaves a further 88.32% of life- time allowance available before a lifetime allowance charge will arise. (This assumes the standard lifetime allowance applies to the individual and they don’t hold any transitional protections, such as fixed protection or individual protection, that were introduced on past occasions when the standard lifetime allowance was decreased.)

When the person reaches age 75, a further test establishes how much lifetime allowance remains across all their pensions, including any pensions that have been transferred into a ‘drawdown’ fund. If the value is more than their remaining lifetime allowance, a charge will be deducted from the remaining funds by the pension scheme/provider and paid to HMRC.

In the example in the box, the person reaches age 75 on 1 April 2020, at which point the standard lifetime allowance is still £1,055,000. They have £950,000 of uncrystallised funds remaining in their pension plan. But their remaining lifetime allowance is 88.32% of £1,055,000, or £931,776. They will be charged tax at 25% on the excess of £18,224, which comes to £4,556.


If you need help with a tax, pension or financial planning problem, please email:

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