Will an inherited pension of £250,000 count towards my lifetime allowance?

I was widowed in 2013. My late wife was a member of an occupational scheme and when she died her pension scheme paid me approximately £250,000 from the fund.

I had no choice whether to stay invested or not. She was in her forties, still working, and therefore had not benefited from her pension.

I am still working and well below my statutory retirement age of 67 and have not used any of my private pensions – all defined contribution.

How is a lump sum of £250,000 I inherited from my late wife's pension in 2013 counted towards the £1.073 million lifetime allowance (stock image)

How is a lump sum of £250,000 I inherited from my late wife's pension in 2013 counted towards the £1.073 million lifetime allowance (stock image)

How is a lump sum of £250,000 I inherited from my late wife’s pension in 2013 counted towards the £1.073 million lifetime allowance (stock image)

The pension company informed me that my lifetime allowance would be reduced by £250,000. At the time the LTA was £1.5m and my funds were worth around £300,000 at the time.

The LTA is now reduced to £1,073,100 and my own funds are worth £950,000 and growing quite well.

Since the LTA has been lowered and has stayed low, where does that leave me? How am I rated – against the £1.5m LTA when I benefited or £1.073m now?

It seems most unfair that all withdrawals from my balance are measured at the new lower rate. Out of caution about the current LTA, I’ve declined to make any further contributions, so I’m missing out on a 40 percent tax benefit.

Likewise, I have not drawn any funds should the LTA increase over the next 16 years — or at least once in 2026 — and I want to deposit more while flouting the annual allowance rules.

I don’t expect to live to be 75, so if I don’t touch my funds under applicable law, I can leave them to a nominated beneficiary tax-free and with no inheritance tax. Does my reduced LTA affect this at all? I understand the tax position should I make it to 75.

Steve Webb responds: The lifetime tax credit is part of the pension tax exemption scheme, which limits the value of pension you can receive over your lifetime while continuing to enjoy the benefits of the pension tax exemption.

It’s not against the law to exceed the LTA, but if you do, you will face a tax bill. This is either 55 percent on lump sum payments over the LTA, or 25 percent (over your normal income tax rate) on periodic payments over the LTA.

As you say in your question, the level of the LTA can change from year to year. It was up to £1.8million at one point (then in 2010/11 and 2011/12) but has since been cut repeatedly.


In 2020/21 it was set at £1,073,100 and the current plan is for it to remain at that level into the mid-2020s.

The good news for you is that when you take money out of an annuity — or “crystallize,” to use the technical term, an annuity — the value of that annuity is compared to the LTA *this year*.

In your example of a pension of £250,000 in a year when the LTA was £1.5m, you would be deemed to have used up only one sixth or 16.67 per cent of your LTA. This is true regardless of the fact that the LTA is now lower.

However, you now have less room to maneuver since the LTA has been reduced.

As mentioned above, this year’s LTA is £1,073,100 and you have 83.33 per cent of your LTA left. This means you could crystallize 83.33 per cent of £1,073,100, or around £894,000, in pension wealth without breaching the LTA.

Until recently, the government used the LTA as a sort of “stealth tax” and froze the limit, with the result that more people will have to pay tax bills and/or more people – like you – will opt-in, not at one to save for retirement.

But there have been some rumors that the government’s desire to get older workers back into the workforce *might* result in an unexpected increase in the LTA.

So if you want to pay out your pension this year, you should think twice about it.

As a widow, did you waive your state pension lump sum?



This is Money columnist Steve Webb is calling on elderly widows who may have missed out on back pay when their husbands died to get in touch.

He wants to help people get money that is rightfully theirs and find out if there is a systematic problem that hasn’t been addressed in the government’s massive corrective action on underpaid older women.

Find out if you may be affected and how to contact Steve here.

> Have you missed your state pension if you were widowed in retirement?

This is because, as I explained above, every payout this year will be tested against this year’s relatively low LTA.

If you used up all of your LTA this year (in your case you withdrew £894,000) then you would have up to 100 per cent LTA usage.

As the rules are currently working, even if the government were to raise the LTA next year, you would not benefit as you would have hit the 100 percent mark.

On the other hand, if you were to defer until next year, the same payout would be a smaller percentage of the new LTA if increased by then, and that would mean you could withdraw additional retirement money without incurring LTA fees attack.

I want to stress that I cannot predict what the budget will contain and that making financial decisions based solely on speculation can be risky.

But if you think the LTA isn’t likely to actually go down over the next year and there’s an outside chance it could go up, some might think it’s worth waiting a few more weeks before doing so tap some or all of their retirement savings.

Finally, on what would happen if you died before the age of 75, HMRC would consider your death (and the passing of your unaffected pensions to a beneficiary) as a ‘benefit event’.

The value of your annuities would be compared to the applicable LTA for that year, and if the percentage used put you over 100 percent of your lifetime allowance, your beneficiaries would have to pay a tax fee.

Ask Steve Webb a retirement question

Former Pensions Secretary Steve Webb is the uncle of This Is Money’s Agony.

He’s ready to answer your questions about whether you’re still saving, about to quit work, or juggling your finances in retirement.

Steve left the Department for Works and Pensions after the May 2015 election. He is now a partner in actuarial and advisory firm Lane Clark & ​​Peacock.

If you would like to ask Steve a pension-related question, please email him at [email protected].

Steve will do his best to reply to your message in an upcoming column, but he will not be able to reply to everyone or correspond privately with readers. Nothing in its answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.

Please include a daytime phone number in your message – this will be kept confidential and will not be used for marketing purposes.

If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free retirement help to the public. It can be found here and phone number 0800 011 3797.

SteveWe get a lot of questions about government pension projections and COPE – the Contracted Out Pension Equivalent. When you write to Steve on this subject, he’s responding to a typical reader question Here. It includes links to Steve’s several previous columns on state pension projections and contracting that may be helpful.

https://www.soundhealthandlastingwealth.com/business/is-a-250k-inherited-pension-counted-in-my-lifetime-allowance/ Will an inherited pension of £250,000 count towards my lifetime allowance?

Brian Ashcraft

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