If you want to know how your pension savings are affected by the lifetime allowance we strongly suggest you speak to a tax adviser or financial adviser.

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 £1,055,000.

How do I know if I’m within the LTA?

Each time you ‘crystallise’ benefits from a pension, the amount you take is measured against the LTA. There are different events where benefits are ‘crystallised’ – known as ‘benefit crystallisation events’. Broadly speaking, they are when you:

  • Move pension benefits into a drawdown policy.
  • Use pension benefits to buy a retirement income product, such as an annuity.
  • Take regular or lump sum withdrawals from a pension (but not from a drawdown policy).
  • Transfer pension benefits into a qualifying recognised overseas pension scheme.
  • Reach 75 and have remaining pension benefits which are ‘uncrystallised’ or in a drawdown policy.

Each time one of these events occurs, your pension provider will send you a certificate to show how much of your lifetime allowance has been used up.

What happens if I exceed 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 the benefits taken.

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 you have one of the protections, this will give you a higher personal allowance which will be used instead of the LTA when there’s a BCE.

New ways you can protect yourself from the lifetime allowance charge

Fixed protection 2016

You won’t be able to apply for this if you already have primary protection, enhanced protection, fixed protection 2012 or fixed protection 2014. It will allow you 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. You’ll lose fixed protection 2016 if these rules are broken or if you start a new pension, unless it’s a transfer of an existing pension to a new provider.

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

Individual protection 2016

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

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

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

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

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

How can I apply for these protections?

You can apply directly to HM Revenue & Customs (HMRC) using the methods described below:

HMRC online service
From July 2016
If your application is successful you’ll be given a protection reference number – keep a note of this as you’ll need it when you want to take your benefits using a protected Lifetime Allowance.

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

Existing way to protect yourself from the lifetime allowance charge

Individual protection

You can apply for individual protection 2014 until 5 April 2017. It provides you with a personalised lifetime allowance that is the value of all your 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 your pension savings since 5 April 2014.

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

Whether or not you can apply for individual protection 2014 will also depend on which, if any, other protections you already have.

HMRC has provided detailed guidance about individual protection and how you may be able to apply for it. This guidance can be found here.

Ways you were able to protect yourself 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 the fixed protection 2016.

Primary Protection

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

Enhanced Protection

This allowed you to take benefits from a pension without being measured against the LTA as long as you 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 your 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, your entitlement may be protected.

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

How will I know if I have any of these protections?

If you’re not sure if you have protection from the lifetime allowance charge, you should contact HM Revenue & Customs. You, or your financial adviser (if you have one), would have had to apply to them for your protection.