The new lifetime allowance and how to protect your pension from additional taxes

Updated: Jun 3, 2019

The standard pensions lifetime allowance, also known as the LTA, is once again being reduced. The LTA is the total value of pension savings that can be accumulated without a tax charge. We have previously seen the lifetime allowance fall from 1.8 million, down to 1.5 million and now it is being reduced yet again from £1.25 million to £1 million from 6 April 2016. This cut off applies to an individual’s entire pension savings, even if spread across various schemes.

So how does this work? Well, savers will pay tax on any excess savings above the Lifetime Allowance Limit. The rate of tax depends on how savers receive the excess. If it is in the form of a lump sum, then the rate of tax is an eye-watering 55 percent. If it is in the form of a regular pension, the excess is taxed at 25 percent. This is on top of your marginal rate of tax.

It is expected that this will generate tax of approximately £1.92 billion by 2019/20.

Many will already have some sort of existing LTA protection in place (such as primary or enhanced protection, fixed protection 2012, fixed protection 2014 or individual protection 2014), If you do, you will automatically keep this protection when the lifetime allowance is reduced to 1 million.

Fixed Protection 2014, allowed savers with pensions likely to breach the £1.25m cap to apply for protection but the deadline for applying for this has passed.

Individual Protection 2014 is still available, but only if the value of your pension savings on 5 April 2014 were over the new limit of £1.25 million. You will not lose individual protection 2014 by making further savings into your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.

If you meet the criteria for individual protection 2014 then your application must be received by HMRC no later than 5 April 2017.

However with less than 8 months till the LTA is reduced once again and if you think that you might be close to reaching the new limit of 1 million, you must consider your options. It is likely there will be 2 new protection regimes which will have the same conditions as the previous fixed and individual protection regimes.

If you take advantage of the new ‘fixed protection 2016’ you will be able to protect your benefit up to 1.25 million, although it is likely that you can have no more benefit accrual after the 5th April 2016.

It has been proposed that Individual protection 2016 will give a personal maximum lifetime allowance of 1.25million, however just like individual protection 2014, an individuals benefits will need to be valued at 1 million or more, on April 5th 2016 to be able to apply.

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