The lifetime allowance is a limit that HM Revenue & Customs (HMRC) set on the total value of pension benefits that an individual can receive without incurring an additional tax charge. The standard lifetime allowance is currently £1.03 million for 2018/19.
In determining whether you have sufficient standard lifetime allowance available you need to take account of all pension payments you are currently receiving as well as any that are starting now. You do not need to include:
- State pension benefits; or
- Any dependant’s or civil partner’s pension you are receiving; or
- Any benefits due to start in the future.
When the lifetime allowance was introduced on 6 April 2006, individuals with existing pension benefits could apply to HM Revenue & Customs (HMRC) for transitional protection from the lifetime allowance tax charge. Since then other forms of protection have been introduced by HMRC and there are now several different forms of protection available (see below). If protection applies, it will affect your standard lifetime allowance entitlement.
If you had pension benefits worth more than £1.5m at 5 April 2006 you would have qualified for an increase to the standard lifetime allowance providing you registered for this before 6 April 2009. When you registered, you will have received a certificate from HMRC confirming the increase to the standard lifetime allowance which will be in the form of a factor.
This protects your benefits built up at 5 April 2006 from any future lifetime allowance change, providing you registered for this before 6 April 2009. In order to qualify for enhanced protection, no further pension contributions (this included additional benefit accrual under a salary related scheme) can normally be made after 5 April 2006.
From 6 April 2012 the lifetime allowance reduced from £1.8 million to £1.5 million. Fixed protection was introduced for individuals who expected their pension savings to exceed £1.5 million by the time they take their benefits. If you registered for fixed protection you will have a lifetime allowance of £1.8 million (or the standard lifetime allowance if greater). You cannot have fixed protection if you already have primary or enhanced protection and normally no further contributions or benefit accrual can be made after 5 April 2012. In order to take advantage of fixed protection you had to register with HMRC before 6 April 2012.
Fixed Protection 2014
From 6 April 2014 the lifetime allowance was further reduced to £1.25 million. As a result, fixed protection 2014 was introduced for individuals who expected their pensions savings to exceed £1.25 million by the time they take their benefits. If you registered for fixed protection 2014 you will have a lifetime allowance of £1.5 million (or the standard lifetime allowance if greater). You cannot have fixed protection 2014 if you already have primary, enhanced or fixed protection and normally no further contributions or benefit accrual can be made after 5 April 2014. In order to take advantage of fixed protection 2014 you had to register with HMRC before 6 April 2014.
Individual Protection 2014
As a result of the reduction in the lifetime allowance to £1.25 million from 6 April 2014 the government are intending to introduce a further form of protection to offer individuals more flexibility in how they protect their pension savings. This will be called individual protection 2014. Individuals who have pension benefits greater than £1.25 million on 5 April 2014 will be able to apply for individual protection 2014, providing they don’t have existing primary protection. Individual protection 2014 will give individuals a protected lifetime allowance equal to the value of their pension benefits on 5 April 2014, subject to an overall maximum of £1.5 million. Unlike fixed protection and fixed protection 2014 there will be no restriction on future contributions or benefit accrual although if the overall value of the pension benefits exceeds the protected lifetime allowance the excess will be subject to the lifetime allowance charge. Individuals will have until 5 April 2017 to apply for individual protection.
Lifetime Allowance Changes
The lifetime allowance for the 2015/16 tax year was £1.25 million and was reduced to £1 million for the 2016/17 tax year.
From April 2018 the lifetime allowance will be increased annually in line with the Consumer Price Index.
Fixed Protection 2016
Is available for those that do not already have a previous version of fixed, enhanced or primary protection and do not contribute into or accrue benefits after 5th April 2016. The lifetime allowance will be £1.25 million or the lifetime allowance at the time, whichever is higher.
There is no minimum fund value requirement.
Individual Protection 2016
Is available for those who do not have primary protection and have funds valued at £1 million or more at 5th April 2016. It protects the value of the fund at 5th April 2016 up to a maximum of £1.25 million. Contributions and/or benefit accrual can still continue.