Defined Benefit Pensions and the Lifetime Allowance

The pension Lifetime Allowance was introduced in 2006 and is the total amount you can build up in pensions savings before incurring a tax charge.

For defined contribution pensions e.g. personal pensions and auto-enrolment company pensions it is easy to work out the total value of your pension savings. You just add the value of all your pots together.

For defined benefit (DB) pensions there is no pot value just a promise of an income for the rest of your life, so how do you factor this in?

In this video we’ll explain the calculation you need to make and the errors to avoid when calculating your Lifetime Allowance position.


The current pension Lifetime Allowance at the time of writing (tax year 21/22) is £1,073,100.

This means you can accumulate £1,073,100 in pensions total. Not per pension but pensions in total.

Anything saved above this amount could be subject to the Lifetime Allowance charge at either 25% or 55%.

Sometimes DB pension administrators will put a value on your benefits so you can compare them in size to a personal pension pot.

This is NOT the value of your DB scheme for Lifetime Allowance purposes.

To work out the value of your DB pension for Lifetime Allowance you need to take your pension income figure and multiply it by 20. You then need to add any pension lump sum onto the figure.

So for example, a person with a DB pension income due at retirement of £30,000 per year and a lump sum of £150,000 would do the following calculation:

£30,000 x 20 = £600,000 + £150,000 = £750,000

So £750,000 is the Lifetime Allowance calculation for this DB pension and is currently below the £1,073,100 Lifetime Allowance.

However this figure would then need to be added to any other pensions the person may have to completely check their Lifetime Allowance position.

With a DB pension you usually find that you have two options at retirement:

A pension income and no lump sum.
A reduced pension income and a lump sum.

Depending on which option you choose will have a different outcome for the Lifetime Allowance calculation.

If you find the total value of all your pensions exceeds the Lifetime Allowance you won’t face a tax charge straight away.

It’s only once you take pension benefits that they are assessed for Lifetime Allowance purposes and then again at age 75.

We’ve written many times before how, for some people, transferring a DB pension to a personal pension pot can be a better option to suit their more flexible lifestyle.

If you proceed down this route you will be offered a cash equivalent transfer value (CETV). This is the value your DB pension administrator is offering you in order to give up the guaranteed income for life.

The CETV can only be used for Lifetime Allowance purposes if you actually proceed with the transfer. If you don’t proceed you continue to use the 20 x formula stated earlier.

Depending on how generous the CETV offer is you may find that once you transfer your DB pension to a personal pension the value for Lifetime Allowance is more.

That’s because CETVs are not worked out on the 20 x formula that’s used for DB pensions and Lifetime Allowance purposes.

The CETV is much more complex than this and will factor in potential bonuses if the scheme is keen to get you out.

Of course, if you were keen on transferring your DB pension and the CETV was over the Lifetime Allowance you need to factor the increased taxation into the overall transfer analysis.

It’s not a given that once your total pension savings are over the Lifetime Allowance that you will pay the charge. There are ways to avoid or significantly reduce the charge. Like taking your pension early.

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