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The lifetime allowance is the maximum amount of pension savings you’re allowed to build up during your lifetime without paying an additional tax charge.

The standard lifetime allowance (LTA) is currently set at £1,073,100.

How will the member know if they’re within the LTA?
Each time the member ‘crystallises’ benefits from a pension, the amount they take is measured against the LTA. There are different events where benefits are ‘crystallised’ – known as ‘benefit crystallisation events’. Broadly speaking, they are when anyone:

  • Moves pension benefits into a drawdown policy.
  • Uses pension benefits to buy a retirement income product, such as an annuity.
  • Takes regular or lump sum withdrawals from a pension (but not from a drawdown policy).
  • Transfers pension benefits into a qualifying recognised overseas pension scheme.
  • Reaches 75 and has remaining pension benefits which are ‘uncrystallised’ or in a drawdown policy.

Each time one of these events occurs, the member’s pension provider will send them a certificate to show how much of their lifetime allowance has been used up.

What happens if the member exceeds the LTA?
Any pension benefits taken that exceed the LTA limit will be liable to a tax charge, known as the lifetime allowance charge. This can be up to 55% of the value of any benefits above the limit.

In response to changing LTA limits, the Government offered various ways in which pension customers were able to ‘protect’ their pensions savings from the lifetime allowance charge. If the member has one of the protections, this will give them a higher personal allowance which will be used instead of the LTA when there’s a BCE.

Existing ways the member can protect themselves from the lifetime allowance charge

Fixed protection 2016
The member won’t be able to apply for this if they already have primary protection, enhanced protection, fixed protection 2012 or fixed protection 2014. It allows them to keep a Lifetime Allowance of £1.25 million beyond 5 April 2016. No further contributions can be paid into any money purchase pensions on or after 5 April 2016.

Increases in the value of defined benefit pensions can’t exceed a set limit in any tax year from 2016/17. The member will lose fixed protection 2016 if these rules are broken or if they start a new pension, unless it’s a transfer of an existing pension to a new provider.

If the member takes benefits which exceed the protected amount, they’ll still be subject to a tax charge on the excess.

Individual protection 2016
The member won’t be able to apply for this if they already have primary protection or individual protection 2014. It allows them to keep a personal Lifetime Allowance equal to the value of all their pension savings on 5 April 2016 (between £1 million and £1.25M). If the LTA is increased by the government to a level above the member’s personal Lifetime Allowance, their savings will be measured against the increased LTA instead.

Contributions into pensions can continue and they’ll also be able to build up further savings in defined benefit pensions. If they apply for individual protection 2016, and they already have enhanced or fixed protection, the enhanced or fixed protection rules will apply. If they lose their enhanced or fixed protection, the individual protection 2016 rules will apply.

If they take benefits which exceed the protected amount, they’ll still be subject to a tax charge on the excess.

If they want to apply for this they’ll need to find out the value of all their pension savings from all of their providers. Once they contact a provider, the provider will have three months in which to give them a valuation of their pension.

If they take benefits which exceed the protected amount, they’ll still be subject to a tax charge on the excess.

How can the member apply for these protections?
They can apply directly to HM Revenue & Customs (HMRC) using the methods described below:

HMRC online service

If their application is successful they’ll be given a protection reference number. They should keep a note of this as they’ll need it when they want to take their benefits using a protected Lifetime Allowance.

They can apply for both fixed protection 2016 and individual protection 2016 when they’re available. If they do, fixed protection 2016 will apply unless they lose it. If this happens, individual protection 2016 will apply.

Ways the member was able to protect themselves from the lifetime allowance charge (but can no longer apply for)

Fixed protection 2012 and 2014
The LTA reduced in 2012, and 2014. Before these reductions took place, pension customers were able to apply to fix their lifetime allowance based on the existing limit. Fixed protection 2012 and 2014 worked in similar ways to fixed protection 2016.

Individual protection 2014
This provides the member with a personalised lifetime allowance that is the value of all their pension savings as at 5 April 2014, up to a maximum of £1.5 million. This value is fixed and will not be adjusted in line with inflation or any further growth in their pension savings since 5 April 2014.

The member will be able to continue to save into their pensions, but if they exceed their personalised lifetime allowance they’ll have to pay a tax charge. If the LTA ever increases to a level above their personalised lifetime allowance, individual protection will stop and their benefits will be measured against the increased LTA instead.

Whether or not the member could apply for individual protection 2014 will also depend on which, if any, other protections they already have.

Primary Protection
If the member had pensions savings that were worth more than £1.5 million on 5 April 2006 they would have been able to apply for primary protection. This would have secured their own personal lifetime allowance.

Enhanced Protection
This allowed the member to take benefits from a pension without being measured against the LTA as long as they don’t build up any further pension benefits. Certain actions, such as enrolling in a new pension or paying into a pension, resulted in the loss of this protection.

Scheme specific tax-free cash protection
Some pension schemes offered protection that allowed members more than the normal amount of tax-free cash. If their pension had a tax-free cash entitlement at 5 April 2006 that was less than £375,000 but more than 25% of the benefits value, their entitlement may be protected.

If they have this entitlement, it will be lost if they transfer the pension, unless it’s a block transfer.

How will the member know if they have any of these protections?
If the member isn’t sure if they have protection from the lifetime allowance charge, they should contact HM Revenue & Customs. They would have had to apply to HMRC for their protection.