Lifetime allowance - All you need to know

The lifetime allowance (LTA) is the maximum amount of pension savings you can build up without a charge being applied when you take your benefits.
Key facts
  • The lifetime allowance is the maximum value of benefits that can be taken from a registered pension scheme without being subject to the lifetime allowance charge.
  • Benefits are only tested against the lifetime allowance when a benefit crystallisation events happens.
  • It may be possible to protect benefits in excess of the lifetime allowance.
  • The lifetime allowance is currently £1,073,100.
  • Since 6 April 2017 the lifetime allowance increases in line with the CPI.
  • The lifetime allowance charge applies if benefits exceed the lifetime allowance.

The limit has varied over the years. It started at £1,500,000 in 2006/07, rose to £1,800,000 in 2011/12 and then steadily reduced to £1,000,000 in 2016/17. Since then it’s increased by the CPI each year and in 2020/21 it stands at £1,073,100.

When does it apply?

A test against the LTA is done when there’s a benefit crystallisation event (BCE).  There’s several benefit crystallisation events, the most common of which are:

  • taking benefits
  • dying
  • transferring to a QROPS
  • reaching age 75

An LTA charge can only apply when the value of your pension savings at a BCE is over the LTA.  So, if you have pension savings of £2,000,000 in 2020/21, there’s no charge at that point but if you crystallise all of your pension savings, there will be an LTA charge on the excess of £926,900.

The crystallised value for a defined contribution (DC) scheme is the amount of the fund taken, for a defined benefit (DB) scheme it’s 20 x the pension taken plus the tax-free cash.

Is there a charge?

If you crystallise benefits above the lifetime allowance, there’s a lifetime allowance (LTA) charge.  It can therefore be seen as a tax on pension savings growth, both growth resulting from contributions and investment returns.

How much is the charge?

It depends on how you take the benefits.  Any excess over the LTA can be taken as a lump sum (a lifetime allowance excess lump sum) and the charge is 55%.

Alternatively, the excess can be used to provide an income, by either a pension annuity or income drawdown. The charge is then 25% but of course any pension instalments or withdrawals made will be taxed at the individual’s marginal rate of income tax.  If the individual pays income tax at 40%, the tax ‘take’ is similar. If the individual pays income tax at 20% the tax take is less.

When the member takes benefits or reaches age 75, both the member and the scheme administrator are jointly liable for paying the charge but normally the scheme administrator will deduct the charge from the pension fund and pay it to HMRC.

How does it work?

Not everyone takes all their benefits at the same time. Someone could be a member of several pension schemes and crystallise them at different times or a defined contribution scheme could be crystallised in stages.

Each BCE uses up a proportion of the LTA that applies at the time.

Every time someone crystallises pension savings, they’re asked by the scheme administrator what percentage of the LTA they’ve already used up.

The scheme administrator then calculates the percentage of the LTA this crystallisation has used up and issues a lifetime allowance statement to this effect to the member. If the crystallisation uses up more than the remaining LTA, the scheme administrator will ask the member whether they want to take the excess as a lump sum or pension and deduct the appropriate charge.  

See our article Benefit crystallisation events and the lifetime allowance charge for examples.

The percentage used up is always based on the LTA in the tax year the BCE happens and the balance left is always applied to the lifetime allowance at the next BCE.

So if someone crystallised £100,000 in 2017/18 when the LTA was £1m, they’ll have used up 10% of the LTA.  If they crystallise more pension savings in 2020/21 they can crystallise up to 90% of £1,073,100 = £965,790 before an LTA charge applies. 

Equally, once they’ve used up 100% of the lifetime allowance, all further BCEs are chargeable – there’s no further lifetime allowance available because the lifetime allowance has increased.

What happens when the member dies?

This is a BCE, or to be accurate is one of several BCEs depending on the benefit taken.  

A BCE 7 is where the beneficiary takes a lump sum death benefit.

A BCE 5C is where the beneficiary takes a beneficiary drawdown.

A BCE 5D is where the beneficiary takes a dependant’s or nominee’s annuity.

Where beneficiary drawdown is available and an LTA charge is due, it doesn’t make any sense for the excess over the LTA to be taken as a lump sum. That will attract a lifetime allowance charge of 55%.  If the death benefit is taken as beneficiary drawdown, the charge will be 25% and the entire drawdown fund can be taken as a lump sum at any time. Of course if death had been after 75, the withdrawals will attract an income tax liability at the beneficiary’s marginal rate.

The liability for paying any LTA charge falls on the recipient, not the scheme administrator.  The charge is calculated by the Executor of the Estate as only they will know what other untested benefits the deceased had.

What happens if UK pension savings are transferred overseas?

A transfer overseas can only be to a Qualifying Recognised Overseas Pension Scheme (QROPS) otherwise it’s an unauthorised payment.

Unlike a recognised transfer between two UK registered pension schemes, a transfer from a UK scheme to a QROPS is a benefit crystallisation event (a BCE 8). So if the amount of the transfer is over the relevant lifetime allowance, a lifetime allowance charge will apply. However, because the payment is not to the member, the rate charged is 25%, not 55%, despite the fact that it involves a lump sum. If the pension savings were in respect of a pension drawdown plan which started before 6 April 2006 there will be no BCE 8 on transfer.

If pension savings were designated as drawdown from 6 April 2006, they will have been tested against the lifetime allowance (BCE1) or scheme pension (BCE2). To prevent double counting the overlap provision apply, the BCE1or BCE2 amount is deducted from the value being transferred as a BCE 8. The difference will be tested against the individuals remaining lifetime allowance and any excess would have a 25% charge deducted.

What happens at age 75?

A more or less final check against the lifetime allowance is made at age 75.  ‘More or less’ because the only BCE that’s possible after age 75 is a BCE 3 which is when a scheme pension from an occupational pension scheme is increased by more than a permitted margin.  This is very unusual.

What’s tested at age 75 is:

  • any uncrystallised DB pension savings – a BCE 5
  • any uncrystallised DC pension savings – a BCE 5A
  • any growth in a drawdown plan since it was set up – a BCE 5B

There are no further BCEs if you crystallise pension rights or die after age 75.

Can you get TFC after age 75?

Yes you can, if the terms and conditions allow. The maximum that can be taken is the lower of 25% of the fund and 25% of the LTA. You might expect the amount of the LTA available to be reduced by any BCEs at age 75 but for this purpose, the BCE at age 75 is ignored. The LTA used in the maximum TFC calculation isn’t reduced by any age 75 BCEs.  

See our article Lifetime allowance at age 75 for more details.

Are there any ways to protect against a lifetime allowance charge?

There are several forms of protection, each of which became available at different points in the history of the lifetime allowance.

When pensions simplification was introduced on 6 April 2006 two types of protection were available:

  • Primary protection. This was available if the value of an individual’s pension savings exceeded the original lifetime allowance of £1.5m at 6 April 2006. An increase factor was applied to the standard LTA based on the amount of the excess over the LTA.  So if someone’s pension savings were worth £3m at 6 April 2006, they were given a primary protection factor of 1, meaning their personal allowance is twice the standard lifetime allowance.  This is based on a standard LTA of £1.8m (the highest the LTA reached) until such time as the standard LTA exceeds £1.8m.

TFC can also have primary protection if the TFC at 6 April 2006 was greater than 25% of the fund and greater than £375,000.  The protected TFC increased in line with increases in the lifetime allowance. The lifetime allowance reached a peak of £1.8m on 6 April 2011 and decreases since then are ignored.

So TFC of 120% (1.8/1.5) of the TFC value at 6 April 2006 can be paid until such time as the standard LTA exceeds £1.8m.  After that it increases in line with LTA increases. If TFC was less than £375,000 at 6 April 2006, the amount payable is the lower of 25% of the fund and 25% of £1.5m.

  • Enhanced protection.  Enhanced protection could be given to pension savings of any size at 6 April 2006 although clearly it will only be useful if the pension savings id likely to exceed the LTA in the future. With enhanced protection, the pension savings can grow to any size but there can be no contributions paid to defined contribution schemes and no relevant benefit accrual in defined benefit schemes post 6 April 2006.

If TFC at 6 April 2006 was greater than £375,000 and greater than 25% of the fund, enhanced protection of the TFC will allow the same percentage of TFC to apply post 6 April 2006.  If TFC was less than £375,000, enhanced protection doesn’t apply to the TFC; the amount available will be the lower of 25% of the fund and 25% of £1.5m.

Scheme specific TFC protection may also apply.

Primary and enhanced protection can apply to both the pension fund and TFC or can apply to the fund only. They had to be applied for before 6 April 2009.

  • Fixed protection. The LTA was steadily reduced from its high point of £1.8m in 2010/11 until it was linked to the CPI from 2018/19.

Each time it was reduced, fixed protection (FP) was made available to allow the member to retain the previous LTA.  However, any contributions or benefit accrual results in the loss of fixed protection. Some transfers also result in the loss of fixed protection.

  • FP12 gives protection of £1.8m
  • FP14 gives protection of £1.5m
  • FP16 gives protection of £1.25m

FP16 is the only one you can now apply for.

Benefit accrual is different from the relevant benefit accrual that applies to enhanced protection. Fixed protection can be lost in any tax year where there’s been any benefit accrual.

Enhanced protection is only lost at the time of taking benefits or transferring from a defined benefit scheme to a defined contribution scheme – the calculation to see if relevant benefit accrual has happened is done at that point.

Individual protection. This allows a protected LTA up to the capped value of total pension savings at a certain date.

Individual protection 2014 (IP14) provides protection up to the lower of the value of total pension savings at 5 April 2014 and £1.5m.  You could apply for it if your pension savings were worth at least £1.25m

IP16 provides protection equal to the lower of the value of total pension savings at 5 April 2016 and £1.25m.  Your pension savings had to be worth at least £1m.

Further contributions, benefit accrual or transfers don’t result in the loss of IP14 or IP16.

You can still apply for FP16 and IP16; there’s no time limit for applications.

You can even apply retrospectively after a BCE.  In that event, the scheme administrator will have to recalculate the amount of LTA used up by the BCE and re-issue the lifetime allowance statement.  If any charge had been paid, they’ll also apply to HMRC for a refund of some or all of the charge - HMRC Pensions Tax Manual:

PTM080000: The lifetime allowance and the lifetime allowance charge: contents

PTM090000: Protection from the lifetime allowance charge: contents

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor. 

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.