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Q&A: What is the Lifetime Allowance and protection process?

22 January 2020

What is the Lifetime allowance and how does protection work? Stephen McPhillips, technical sales director, Dentons Pension Management, provides answers to some typical questions asked of the firm’s support team

What is the Lifetime allowance?

The lifetime allowance (LTA) is the overall amount of pension savings that can be put into payment, or crystallised, without incurring a tax charge over the course of a lifetime. The standard lifetime allowance for tax year 2019/20 is £1.055 million and for tax year 2020/21 is £1.073 million.

At the point of crystallisation, any amount of your client’s pension savings that are above the LTA are subject to a tax charge of 25%, if paid as regular income such as drawdown, or 55% if paid as a lump sum.

In order to avoid a tax charge on pension savings, you should closely monitor all of your client’s pension savings to ensure that they avoid, or minimise, any potential impact of the LTA. You may also wish to discuss with clients the possibility to obtain protection against the effects of the lifetime allowance and changes to it over the years, if you have not already.

There are currently two types of lifetime allowance protection still available, Individual Protection 2016 and Fixed Protection 2016. Clients can apply for either of these options on the HMRC website.

What is Individual Protection 2016?

An individual who, on 6 April 2016, did not have primary protection or individual protection 2014 and whose benefits in registered pension schemes had a total value of more than £1 million, can register for individual protection 2016 (IP2016). This enables them to have a personal LTA of the lower of that value and £1.25 million rather than accept the reduction of the standard LTA to £1 million from £1.25 million with effect from 6 April 2016 and continue to have benefit accrual* in their schemes. The only time limit on applying for IP2016 is that it must be in place before the individual wants to take benefits.

*Benefit accrual includes personal and employer contributions to money purchase schemes such as SIPPs and SSASs and benefit accrual in defined benefit or cash balance schemes.

What is Fixed Protection 2016?

An individual who, on 6 April 2016, did not have enhanced protection, primary protection, fixed protection 2012, fixed protection 2014 or individual protection 2014, can register for fixed protection 2016 (FP2016), if they want to retain the then standard lifetime allowance (LTA) of £1.25 million as their personal LTA rather than accept the reduction of the standard LTA to £1 million with effect from 6 April 2016. For FP2016 to remain valid, the individual must have no benefit accrual* in any of their registered pension schemes on or after 6 April 2016.

The only time limit on applying for FP2016 is that it must be in place before the individual wants to take benefits.

*Benefit accrual includes personal and employer contributions to money purchase schemes such as SIPPs and SSASs and benefit accrual in a defined benefit or cash balance schemes.

Lifetime allowance protection can be a very complex subject, so you should ensure that you clearly map out this option with your clients before they apply.

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