Pension Lifetime Allowance & Fixed Protection
– by Sam Brooks
What is the Lifetime Allowance (LTA)?
The Lifetime Allowance was introduced on 6th April 2006 (A-Day) but has not remained at the same level (see graph below). It is the limit on the value of pay-outs from all of your pension schemes that can be made without triggering an extra tax charge. This guide explains the rules and how to protect your allowance.
There is no limit on the value of pension savings that can be built up by an individual, however, if they exceed the lifetime allowance when they are taken, the amount in excess of the lifetime allowance will be subject to a tax charge known as the “Lifetime Allowance Charge”.
The excess will be taxed either at:
- 55% if taken as a lump sum
- 25% if taken as income through an annuity or drawdown
How can you protect your pension pot?
Since April 6th 2018, the LTA has risen from £1m to £1,030,000 however there are two ways by which individuals can increase their LTA.
- Fixed protection 2016 – If you, or your employer, have made no pension contributions since 5 April 2016, you can apply for fixed protection 2016. This will give you a lifetime allowance of £1,250,000. This protection would be lost if any future contributions are made.
- Individual protection 2016 – If your funds were over £1,000,000 at 5 April 2016, you could instead apply for individual protection 2016. This gives you a lifetime allowance of the value of your pension rights as at 5 April 2016, subject to a maximum of £1,250,000. There is no requirement to stop pension funding.
You can apply through this link directly to HMRC, by doing so then any growth on the protected amount will not attract an additional LTA charge. This is something we would recommend for the vast majority of people as making use of the still available increased LTA of £1.25m through Fixed Protection 2016 will instantly reduce the potential tax burden on your pension pot by £121,000.
Find out if you are going to reach your Lifetime Allowance Limit
Your pension scheme should be able to provide projections as to what your benefits might be worth at retirement.
Careful monitoring may be needed as you approach retirement to work out whether you are likely to breach the allowance.
And remember, you will need projections for all your pension pots. If you have several pensions, monitoring can be made easier if you consolidate them into a single pot. Consolidating pensions will not be right for everyone, you need to consider all the facts and decide if it’s right for you
If you are likely to breach your lifetime allowance you have two choices;
- Stop contributing and save for your retirement outside your pension – Stopping contributions might mean that lifetime allowance charges are limited or avoided completely. But you need to consider the taxation of any investments you decide to save in to instead. And for employees, it could mean giving up on valuable employer pension funding too.
- Carry on saving into your pension and pay the tax charge when you take benefits – You don’t have to stop saving once you hit the lifetime allowance. It simply means that there will be a tax charge designed to recoup the tax relief on the additional funds. But even after paying the tax charge, your pension might still be the best place to save for your retirement.
If you are unsure whether or not your combined pensions might reach or pass through the LTA limit then it is important that you request a valuation from all of your trustees. This is a straightforward process and we would be happy to talk you through it, contact us to find out more.