What is the lifetime pension allowance (LTA)?
If your pension(s) fund has reached or is projected to exceed the lifetime allowance and you don’t have any protection and you wish to retire or drawdown you’re 75, whichever comes first, you may face charges on your pension due to being over the LTA. This is due to the pension lifetime allowance, which limits the total amount you may save for retirement while still receiving full tax advantages.
The LTA has actually decreased in previous years, as shown below.
| Tax year | Amount |
| 2006/07 | £1.50m |
| 2007/08 | £1.60m |
| 2008/09 | £1.65m |
| 2009/10 | £1.75m |
| 2010/11 | £1.80m |
| 2011/12 | £1.80m |
| 2012/13 & 2013/14 | £1.50m |
| 2014/15 & 2015/16 | £1.25m |
| 2016/17 & 2017/18 | £1.00m |
| 2018/2019 | £1.03m |
| 2019/2020 | £1.055m |
| 2020/2021 | £1.0731m |
| 2021/2022 | £1.0731m |
| 2022/2023 | £1.0731m |
Note: This doesn’t include your state pension, this applies to the value of all of your pensions.
The Lifetime Allowance (LTA) is the total amount of tax-favoured pension funds that a member of a personal pension scheme can accumulate throughout their lifetime before incurring a Lifetime Allowance tax charge. When a test is performed, if the entire amount of your pension benefits exceeds the lifetime allowance, you must pay tax on the surplus.
You can opt for protection in the terms of fixed, enhanced, or individual
Enhanced protection offers full protection against a lifetime allowance (LTA) tax charge. This is on the condition that all contributions or other relevant benefit accrual ceased before A-Day (6 April 2006).
Anyone could apply for this protection, regardless of the value of their pension savings at A-Day. As long as the protection isn’t lost or revoked, there will never be an LTA tax charge.
It was introduced to protect individuals whose benefits were likely to exceed the LTA. Individuals had to apply for enhanced protection before 6 April 2009.
If the value of the benefits when they are accepted exceeds the lifetime allowance, the difference is subject to the lifetime allowance charge. The lifetime allowance charge can be charged in one of two ways, or a mix of both, depending on how the value of the excess benefit beyond the lifetime allowance is received; the charge is 55% if received as a lump sum, or 25% if received as income.
Individual protection provides protection against the reductions in the lifetime allowance (LTA) which occurred in 2014 and 2016. There are two versions of protection:
- Individual protection 2014 (IP2014) which provided protection against the fall in the LTA from £1.5M to £1.25M
- Individual protection 2016 (IP2016) provides protection when the LTA is reduced from £1.25M to £1M.
Individual protection provides an increased personal LTA based on the value of their total pension benefits at the point when the standard LTA was reduced. There’s no requirement to cease funding, but benefits in excess of the personal LTA will be subject to the LTA tax charge.
The two versions of Individual Protection have the following limits.
IP2016
- Gives a personal LTA between £1M and £1.25M
- Protection valid from: 6 April 2016
- Applicant needs at least £1M of total pension benefits as at 5 April 2016
IP2014
- Gives a personal LTA between £1.25M and £1.5M
- Protection valid from 6 April 2014
- Applicant needed at least £1.25M of total pension benefits as at 5 April 2014
Clients who have already secured a higher personal LTA may be unable to apply for individual protection.
- IP2014 is not available for those who already have primary protection as they will have already secured a protected LTA in excess of £1.5M.
- Similarly, IP2016 is not available for those who already have primary protection or IP2014.
For those that don’t have the protection when you withdraw a lump sum or income from your pension fund, transfer internationally, or reach age 75 with unused pension benefits, you’ll usually have to pay a tax charge on the excess. The excess can be paid in a lump sum at a tax rate of 55 percent, or it can be kept in your pension fund for income at a rate of 25 percent.
Lifetime Allowance Calculator
Regularly reviewing the value of your pensions is the best way to keep track of whether you could exceed the lifetime allowance. When you reach the age of 75, your pension value is automatically evaluated. You may anticipate how the value of your pensions will fluctuate over time and prepare appropriately to see whether it exceeds the lifetime allowance.
The way your pensions are evaluated is determined by the sort of plan you’re a part of. Defined contribution pensions, which provide you with a retirement income based on you and your employer’s contributions, are assessed based on the value of your pension fund as a whole.
Defined benefit plans, which offer a retirement income depending on your salary and length of service with your company, are more complicated.
There is a common formula for calculating the overall pension value for lifetime allowances for these pensions: multiply your estimated yearly pension by 20 and add this figure to the amount of any tax-free cash lump payment from that pension.
If you reach the age of 75 with unused pension benefits or pension assets in drawdown, your pension value will be tested against the lifetime allowance automatically. If the test determines that your pension benefits exceed the lifetime allowance, you will be required to pay taxes, which we already previously showed you.
Members of the pension scheme use up a portion of their LTA when they collect benefits from HMRC registered pension schemes. If the individual takes extra benefits later, the new benefits are assessed against the member’s remaining LTA percentage. The common calculation for determining LTA usage, according to Finance Act 219, requires the previous crystallized amount to be indexed at the same rate as the normal LTA. This is accomplished using the following formula:
Relevant Untaxed Amount x (Current Standard Lifetime Allowance/Previous Standard Lifetime Allowance)
Relevant Untaxed Amount, is the prior BCE amount, Current Standard Lifetime Allowance, is Standard LTA today, and Previous Standard Lifetime Allowance is LTA at the time of the previous BCE.
Pension Allowance 2021/22
From the tax year 2018/19 to 2020/21, the LTA was increased annually by the Consumer Prices Index (CPI), however from 2021/22 to 2025/26, the government suspended the increases.
The lifetime allowance has stayed at £1.073m and is now set to remain fixed until 2026.
Beneficiary Pension Lifetime Allowance
If you pass away before the age of 75, you will be subjected to the same automated test. In this circumstance, your beneficiaries can decide how they want to take the pension money, and their option will decide the tax rate that will be levied. Regardless of the amount of your pension plan, your beneficiaries are responsible for paying the levy to HMRC.
It’s not as simple as keeping your lifetime limit below 1.073 million. It’s a proportion of your lifetime allotment that you’ve spent over your lifetime. If you had half a million in your pension pot and drew out a hundred thousand pounds, that amount would be tested against your lifetime allowance at that time.
As your pension fund grows, you’ll be tested on a regular basis when benefit crystallization events occur or you reach the age of 75. Unfortunately, remaining below that number isn’t enough. It’s about how much of your lifetime allowance you’ve used up.
Conclusion
If you are projected to go over the LTA or thinking that you might be over it and unsure what steps you can take to reduce the tax, please give me an email on info@investmentsforexpats.com.
There may be ways you can become tax-efficient and make the most out of your retirement fund. It does depend on an individual’s circumstances as to what I can offer.
Other blogs I have written on this topic are:
