HM Revenue and Customs impose two controls on the amount of pension savings you can make without having to pay extra tax. These controls are known as the annual allowance and lifetime allowance. This is in addition to any income tax you pay on your pension once it is in payment.
This factsheet looks at the Lifetime Allowance (LTA) which the total value of all pension benefits you can have without triggering an excess benefits tax charge.
The lifetime allowance is the total value of all pension benefits you can have without triggering an excess benefits tax charge. If the value of your pension benefits when you draw them (not including any state retirement pension, pension credit or any partner’s or dependant’s pension you may be entitled to) is more than the lifetime allowance, or more than any protections you may have, you will have to pay tax on the excess benefits.
The lifetime allowance covers any pension benefits you may have in all tax-registered pension arrangements – not just the Local Government Pension Scheme (LGPS).
The lifetime allowance was introduced in 2006 and was reduced in 2012, 2014 and again in 2016 but from April 2018 is increased annually in line with the Consumer Price Index (CPI).
Each time the lifetime allowance limit reduced, if you had already planned your pension savings on the basis of the higher lifetime allowance limit you could protect your pension savings by applying to HMRC for a protection certificate. These protections are covered in more detail later in this factsheet.
The lifetime allowance limit has been steadily reducing from 2012/13 until 2018/19, as below:
|Tax Year||Lifetime Allowance|
The lifetime allowance limit will be increased in line with inflation from 2018 onwards (£1,030,000 from 6th April 2018).
For pensions that start to be drawn on or after 6 April 2006, the capital value of those pension benefits is calculated by multiplying your annual pension by 20 and adding any lump sum you draw from the pension scheme.
For pensions already in payment before 6 April 2006, the capital value of these is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.
When any LGPS benefit, or any other pension arrangement you may have, is put into payment you use up some of your lifetime allowance – so even if your pensions are small and individually will not be more than the lifetime allowance you should keep a record of any pensions you receive. If you have a pension in payment before 6 April 2006, this will be treated as having used up part of your lifetime allowance.
If your LGPS benefits are more than your lifetime allowance limit you will have to pay tax on the excess. If your excess benefits are paid as a pension the charge will be 25%, with income tax deducted on the ongoing pension payments; if the excess benefits are taken as a lump sum they will be taxed once only at 55%.
You can choose to pay the tax charge immediately by a reduction to your lump sum or you can ask the scheme to pay the charge for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit.
|Sarah retires on 31 May 2016|
|LGPS annual pension||£20,000|
|LGPS lump sum||£45,000|
|AVC taken as lump sum||£200,500|
|Capital Value of benefits||£645,500|
|(£20,000 x 20 + £45,000 + £200,500)|
|Sarah has not drawn any pension benefits previously; the capital value of her benefits is less than the LTA limit for 2016/17 of £1million. She has used 64.55% of the available LTA.|
|Patrick retires on 31 May 2016|
|LGPS annual pension||£45,000|
|LGPS lump sum||£150,000|
|AVC taken as lump sum||£20,000|
|Capital Value of benefits||£1,070,000|
|(£45,000 x 20 + £150,000 + £20,000)|
|Tax charge payable on benefits in excess of £1m (£70,000 x 55%)||£38,500 Tax charge|
|This example assumes Patrick has not applied for any lifetime allowance protection and that he has opted to be paid the benefits in excess of the LTA as lump sum. He has used 100% of the available LTA.|
The lifetime allowance limit be reduced from £1.25 million to £1 million from 6 April 2016.
Two new protections were introduced from 6 April 2016 and are known as Fixed Protection 2016 and Individual Protection 2016. These protections are the same in design as Fixed and Individual Protections 2014 which were introduced when the lifetime allowance reduced from £1.5 million to £1.25 million in 2014.
You can apply for Individual protection 2016 from 6 April 2016 if you have pension savings valued at over £1 million (including taking into account past benefits already in payment) on 5 April 2016. However, if you have primary protection or individual protection 2014 you can’t apply for IP2016.
IP2016 gives a protected lifetime allowance equal to the value of your pension rights on 5 April 2016 – up to an overall maximum of £1.25 million. You will not lose IP2016 by making further savings in to your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.
You can apply for Fixed Protection 2016 from 6 April 2016 if you expect your pension savings to be more than £1 million (including taking into account past benefits already in payment) when you come to take them on or after 6 April 2016. FP2016 can be used to help reduce or mitigate the lifetime allowance charge.
You can’t have FP2016 if you already have primary, enhanced, fixed protection 2012 or fixed protection 2014.
With FP2016 your lifetime allowance is fixed at £1.25 million rather than the standard lifetime allowance. The maximum tax free lump sum you can take on retirement is the lesser of:
Please note, you will lose FP2016 if you are an active member of the LGPS on or after 6 April 2016. FP2016 is lost if your benefits increase by more than the cost of living increase. As the cost of living increase for the year 2016/17 is zero, any pension build up, however small, will lead to your pension increasing by more than zero. Therefore, members wishing to apply for, and keep, FP2016 will need to opt out of the LGPS with effect from 6 April 2016. You may wish to take independent financial advice to understand your own situation before making your decision.
FP2016 will also be lost if you start a new pension arrangement, other than to accept a transfer of existing pension rights, or if you pay contributions into a money purchase pension arrangement, other than to a life assurance policy providing death benefits that started before 6 April 2006. You will also be subject to restrictions on where and how you can transfer benefits.
HMRC are introducing a new online self-service for pension scheme members to apply for individual protection 2016 (IP2016) or fixed protection 2016 (FP2016). You will no longer receive a lifetime allowance protection certificate, instead once you have successfully applied for protection the online service will provide you with a reference number which you will need to keep.
The lifetime allowance was introduced in 2006 and was reduced in 2012, 2014 and again in 2016.
Each time the lifetime allowance reduced, if you had already planned your pension savings on the basis of the higher lifetime allowance you could protect your pension savings by applying to HMRC. If you have applied for a previous protection i.e. enhanced protection, primary protection, fixed protection 2012, individual protection 2014 or fixed protection 2014 you should have received a certificate to confirm your protection.
However you may still be subject to the lifetime allowance charge if you lose this protection.
You can find more information these protections and when they may be lost at Tax on your private pension contributions.
Before considering any action to reduce your tax liabilities you should always seek independent financial advice from an FCA registered adviseri. For help in choosing an independent financial adviser visit the money advice website.
There are certain considerations that you may wish to take into account:
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