Lifetime allowance

Lifetime allowance

What is the current pension lifetime allowance?

The lifetime allowance or LTA is the limit the government has set for the value of funds that you can have across all your pension pots in total. The current lifetime allowance is £1million. From 6 April 2018 it is due to rise annually with consumer price inflation (CPI).

How to find out if you are near the lifetime allowance

To discover whether you are near the lifetime allowance you need to value all of your workplace and personal pensions as follows:

Type of pension How to value it
Personal pensions or defined contribution schemes including SIPPs -  that are not yet in payment The current value of the investments and cash
Final salary or defined benefit pensions  - that are not yet in payment The annual pension x 20 plus any additional tax free cash entitlement
Pensions which have been accessed on or after 6 April 2006 The percentage of the lifetime allowance used up as shown on the certificate issued by the pension provider. This percentage is then applied to the current LTA
Final salary or defined benefit pensions - which were accessed on or before 5 April 2006
Annuities -  purchased on or before 5 April 2006
The annual pension x25 at the first time you take benefits on or after 6 April 2006. This is then adjusted to take into account any change in the LTA between the date you first took benefits after 6 April 2006 and today.
Pensions in capped drawdown  - that started before 6 April 2006 80% of the maximum income you are permitted to take x25 at the first time you take benefits on or after 6 April 2006. This is then adjusted to take into account any change in the LTA between the date you first took benefits on or after 6 April 2006 and today.
Pensions now in flexi-access drawdown that started in drawdown on or before 5 April 2006 - and were not previously in flexible drawdown 80% of the maximum income you would have been permitted to take under capped drawdown in the year you converted to flexi-access drawdown x25 at the first time you take benefits on or after 6 April 2006. This is then adjusted to take into account any change in the LTA between the date you first took benefits on or after 6 April 2006 and today.
Pensions now in flexi-access drawdown that started in drawdown on or before 5 April 2006 - and were previously in flexible drawdown 80% of the maximum income you would have been permitted to take under capped drawdown in the year the flexible drawdown declaration was made x25 at the first time you take benefits on or after 6 April 2006. This is then adjusted to take into account any change in the LTA between the date you first took benefits on or after 6 April 2006 and today.

The sum of these pension values can then be compared to the lifetime allowance. If you are near or over the lifetime allowance – usually because the allowance has been reduced - then you may be able to obtain some form of protection. See below for more details.

When is the lifetime allowance used?

Whenever you take benefits from your pension, the value of the benefits that you are taking – whether through payments from a final salary scheme, drawdown, a lump sum or an annuity purchase – is then calculated as a percentage of the lifetime allowance and you will get a certificate showing the percentage of the allowance used. For example if your pension fund is worth £300,000 and you decide to buy an annuity then you will have used 30% of the £1m lifetime allowance. This is not the case if you hold any form of protection – see below.

Your fund value will also be measured against the lifetime allowance if you reach age 75 with benefits that you have not taken or are in drawdown.

What happens if I go over the lifetime allowance?

If you do exceed the lifetime allowance then you have two choices – you can take the excess as a lump sum less tax of 55% or you can keep the excess within the pension fund and pay a tax charge of 25%. If you keep the excess in the fund you will pay income tax on it as normal when you withdraw it.

If you have obtained some form of protection you will be able to protect more of your fund from these charges.

What are the different forms of protection?

Each time that the Government has reduced the lifetime allowance it has made available new forms of protection for people impacted by the reduction. The last change was made on 6 April 2016 when the lifetime allowance reduced from £1.25m to £1m. If your total pension savings are currently more than £1m or you believe that they may grow to more than £1m you might want to look at whether you are eligible for one of the 2016 forms of protection.

Fixed protection 2016 Individual protection 2016
Protected lifetime allowance £1.25m Value of your pension fund at 5 April 2016 subject to a maximum of £1.25m
Tax free cash protection 25% of the fund value up to £1.25m 25% of the fund value up to the protected amount
Conditions  No further pension contributions on or new pension arrangements on or after 6 April 2016

No other forms of protection can be held, other than individual protection 2014. But you can have both fixed and individual protection for 2016 so if your fund value falls below £1m you can revoke fixed protection and make further contributions
Value of pensions at 5 April 2016 must be more than £1m.
Must not have primary protection or individual protection 2014
Can you continue making contributions? Not after 6 April 2016 Yes
How do you apply? Application is online and you will need to have an HMRC Online Services account. Application is online and you will need to have an HMRC Online Services account.

 

Fixed protection 2014 Individual protection 2014
Protected lifetime allowance £1.5m Value of your pension fund at 5 April 2014 subject to a maximum of £1.5m
Tax free cash protection 25% of the fund value up to £1.5m 25% of the fund value up to the protected amount
Conditions No further pension contributions or new pension arrangements Value of pensions at 5 April 2014 must be more than £1.25m.
Must not have primary protection
Can you continue making contributions? No Yes
How do you apply? You can no longer apply Apply online on the HMRC website until 5 April 2017
Fixed protection 2012
Protected lifetime allowance Higher of £1.8m or standard LTA
Tax free cash protection 25% of the fund value up to £1.8m
Conditions No further pension contributions or new pension arrangements
Can you continue making contributions? No
How do you apply? You can no longer apply
Enhanced protection 2006 Primary protection 2006
Protected lifetime allowance Unlimited Primary protection factor shown on your certificate multiplied by the higher of the standard LTA and £1.8m plus £1.8m. If this is exceeded you will be subject to an LTA charge
Tax free cash protection As shown on the protection certificate As shown on the protection certificate
Conditions No further pension contributions or new pension arrangements  
Can you continue making contributions? No Yes
How do you apply? You can no longer apply You can no longer apply

What do I do if I want to take my pension from my SIPP and I have exceeded the lifetime allowance or have a form of protection?

First you should read our SIPP benefits guide and consider your options and the risks carefully.
When you are ready to take benefits from your SIPP you should complete the relevant SIPP benefits form. You will also be asked to complete the transitional protection and lifetime allowance form.

Case study: John’s pension is valued at more than the current lifetime allowance

John

At 5 April 2016 John had £550,000 in his SIPP and £650,000 in his employer’s pension scheme, £1.2m in total. He decided to apply for fixed and individual protection 2016.

In 2020, when John is 60, he decides to go into drawdown, take all of his tax free cash and leave the rest in his fund. At this point the lifetime allowance is £1,050,625 (assuming CPI increases of 2.5%).

Scenario 1: John’s fund has grown and is now valued at £1.3m. John uses his fixed protection of £1.25m and has an excess of £50,000. He decides to leave this in the fund and pays an excess charge of 25% or £12,500. If John had not had the protection then the excess would have been £300,000 and the tax charge £75,000.

Scenario 2: John’s fund has fallen to a value of £1m which is below the £1.2m allowance for his individual protection. John decides to maximise his pension contributions and pays in £160,000 gross using his £40,000 annual allowance and each of the previous three years unused annual allowances – previously he could not make contributions and keep his fixed protection. His fixed protection is now revoked. John now uses his individual protection of £1.2m to access his full fund of £1.16m with no excess tax charge. If John had not had individual protection he would only have been able to contribute £50,625 to bring his fund value up to the standard lifetime allowance.