Accruing large pension entitlements is a key goal, whether via a final salary pension (termed, Defined Benefit) or a personal pension scheme (termed, Defined Contribution). However, amassing too large a pension can come with unforeseen tax consequences.

The term pension ‘Lifetime Allowance’ refers to the maximum pension entitlements that a person can accrue (excluding the State Pension) before an extra tax charge is applied. Given the complexity of the calculations involved and the severe penalty for mis-managing the situation, receiving specialist Lifetime Allowance advice and Lifetime Allowance Charge advice can provide huge monetary benefit.

In the 2021/22 budget, when setting out post-Covid economic measures, it was confirmed that the Lifetime Allowance would be frozen at the 2020 rate of £1,073,100 until April 2026.

The Lifetime Allowance was originally set at £1.5m in the 2006/7 tax year, with legislation stipulating that the limit would increase to £1.8m in the tax year 2010/11. At this point it would increase by RPI each year. However, due to the changing financial landscape, in 2010 the Government announced that the Lifetime Allowance would be reduced to £1.5m from April 2012, with no inflationary increases. This was reduced again to £1.25m in April 2014 and to £1m in 2016, to be increased by inflation each year (measured by CPI).

In the 2021/22 budget, when setting out post-Covid economic measures, it was confirmed that the Lifetime Allowance would be frozen at the 2020 rate of £1,073,100 until April 2026.

Transitional relief has been provided for those that planned for a higher limit, in the form of Fixed Protection (at the level prior to the reduction, which was available if no further ‘benefit accrual’ took place) or Individual Protection (set at the value of the individual’s entitlement at the given date, with future
accrual permitted).

A lifetime allowance calculation takes place every time a ‘benefit crystallisation event’ occurs. There are thirteen such events, including commencing a Defined Benefit pension, taking tax-free cash from a Defined Contribution pension, buying an annuity, turning 75 or dying with Defined Contribution pensions still in place.

When a crystallisation event occurs, resulting in all or part of the entitlement being above the available Lifetime Allowance, a Lifetime Allowance charge occurs.

  • If this occurs due to Defined Contribution entitlements, the Lifetime Allowance charge is applied to the amount in excess of the Lifetime Allowance, at either 55% (if taken as a lump sum) or income tax plus 25% (if taken as an income).
  • If the Lifetime Allowance is exceeded by a Defined Benefit pension, the scheme uses a ‘debit factor’ to calculate the amount to deduct from the ongoing pension entitlement.

If the LTA charge is taken as income, resulting in an income tax plus 25% charge, the rate of tax is determined in the tax year the income is received. This results in a total charge of:

  • 40% for a basic rate taxpayer,
  • 55% for higher rate taxpayer,
  • 57.5% for additional rate taxpayer.

It is worth noting that any pension, whether Defined Benefit or Defined Contribution, that is in excess of the Lifetime Allowance does not have a tax- free entitlement.

1. Fully understand your current situation.
– What are your current pension entitlements worth in monetary terms, and what are they worth in Lifetime Allowance terms?

2. Consider how your pension entitlement may change in the future.
– How will your entitlements change if you continue to contribute at current levels, alter regular payment amounts or make lump sum pension contributions?
– What effect would a change in your pensionable salary have?
– Consider how your Defined Benefit entitlements accrue and what revaluation factors are applied until retirement age.
– How are your Defined Contribution pensions invested? What is a reasonable rate of future return? What impact would higher or lower than expected investment returns have? Can you better control investment risks in order to optimise your Lifetime Allowance situation?

3. Attempt to calculate when you may reach and/or exceed your Lifetime Allowance.
– What assumptions should you incorporate?
– How sensitive are the projections to the assumptions used?

4. Consider the actions you can undertake to limit your exposure to a Lifetime Allowance charge.
– Can you apply for Transitional protection, whether Fixed or Individual Protection?
– Can you crystalise your pensions in a certain order to reduce the impact of the Lifetime Allowance charge? For instance, starting a Defined Contribution pension before a Defined Contribution pension, or vice versa?
– How should you draw benefits from your pensions? Draw the tax-free cash in stages? Utilise pension flexibility, or generate additional security?
– Can you better control investment risks, in order to more accurately target future pension values?

5. If you have exceeded your Lifetime Allowance, what options should you consider?
– Drawing benefits from alternative assets, such as ISAs
– Saving into a spouse’s pension, instead of your own
– Commencing a ‘phased’ retirement.
– Utilising early retirement factors to reduce the value of the Benefit Crystallisation Event
– Should you continue making pension payments, particularly if an active member of a company pension scheme?

Regardless of the situation you face, taking advice can provide tangible benefits, with the prospect of significant  financial savings.

Walpole Financial Management provide specialist Lifetime Allowance advice, helping analyse the situation, calculate the potential exposure and propose specific actions to best optimise your retirement position.

With the highest level of qualification, over 100 years of collective experience and with expert knowledge of how to  construct effective retirement plans, Walpole Financial Management are best positioned to help you navigate this  complicated and potentially damaging landscape.

Walpole is a firm of independent lifetime allowance chartered financial planners in Surbiton, Surrey which offers the best lifetime allowance protection advice.

Our specialist team of lifetime allowance advisors have the highest level of qualification to help you avoid tax charge and provide you a higher lifetime allowance.

Get in touch with our expert financial advisors for:

  • Lifetime allowance uncrystallised funds pension lump sum (UFPLS) advice
  • Lifetime allowance death advice
  • Lifetime allowance annuity advice
  • Lifetime allowance primary protection and enhanced protection advice
  • Lifetime allowance tax free cash advice Surrey

The lifetime allowance or LTA is a threshold on the amount you can withdraw from pension benefits in your lifetime without triggering a surplus tax charge. The pension amount to be withdrawn can be in any form – a lump sum, a lifetime allowance annuity income, a flexible income, or through any other means.

Hence, the allowance is applicable to your total pension savings, which can be under different pension schemes, work and personal pensions, except State Pension allowance.

For the 2020/2021 tax year, the LTA is £1,073,100 and is expected to rise with respect to the current inflation rate. It means, as much as £1,073,100 can be drawn without paying any allowance charge even after your retirement.

Any benefit taken in excess of the cap of lifetime allowance is taxable. Hence, it becomes essential to plan in terms of the timing and order chosen to draw on pensions.

Here are a few ways you can manage your pension lifetime allowance:

LTA Reduction 2016

You can protect your pension savings under the 2016 reduction of the standard lifetime allowance program. There are two protections you can apply for:

  • Individual protection 2016 – It will protect your lifetime allowance, at the value of your pension savings on 5 April 2016, or £1.25 million, whichever is the lowest.
  • Fixed protection 2016 – It will fix your lifetime allowance at £1.25 million, but you will not be able to contribute to your pension anymore.

Stopping Pension Contributions

If you realise that you are approaching the lifetime allowance limit, you can simply stop your contributions to your pensions. Instead, you can invest your money into an alternative tax-efficient environment and change your investment strategy. Otherwise, you can consider early retirement.

UFPLS (Uncrystallised Funds Pension Lump Sum)

A UFPLS is a way of taking funds directly from the pension pot, once the member reaches pension freedom age. The member can take UFPLS at any time and from any part of their SIPP, provided he/she hasn’t already accessed the pot previously.

Since the member hasn’t set up a lifetime allowance drawdown scheme, bought an annuity, or took a tax-free lump sum of 25% of the pot, he/she can enjoy 25% of the tax-free money under UFPLS.

A lifetime financial advisor is one who helps you to identify your problem and offer different solutions, based on a full review of your unique circumstances.

The rules around the LTA are very complex, hence it requires a professional financial advisor to make the right decisions. Receiving lifetime allowance tax-free cash advice from a Chartered financial planner can be highly helpful in lifetime allowance planning and managing your pension amount.

The Lifetime Allowance Chartered Financial Planner has to demonstrate the highest levels of technical knowledge and competence through professional qualifications. Plus, they have to attain additional levels of qualifications, far in excess of the minimum needed to act as a financial adviser.

Therefore, they possess a deep technical knowledge of the lifetime allowance and assist you in better pension planning and the most profitable investment option.

You would need to have a Government Gateway user ID and password to check your existing protection. If you do not have a user ID, you can create one when you check.

Before you can apply for individual protection, there are a few eligibility conditions that you should be aware of. For example:

1. You can apply for individual protection if your pension savings amount was over £1 million on 5 April 2016.

2. You are still eligible to apply for individual protection if you already have:

  • Enhanced protection
  • Fixed protection
  • Fixed protection 2014
  • Fixed protection 2016

You simply need to tell HMRC in writing that your Individual protection 2016 will stay dormant until you lose or give up your previous protection.

3. You are not eligible to apply if you have any of the followings:

  • Primary protection
  • Individual protection 2014

Applying for individual protection

Firstly, you would need a Government Gateway user ID and password to apply for individual protection. If you do not have the details of your user ID, you can create one when you apply.

You must also know how much your pension savings were worth on 5 April 2016 and a breakdown of the amount.

In case you do not know it, you can ask your pension scheme administrator(s). If you have multiple schemes, add the amounts from each scheme together to calculate its worth on the given day.

When you apply for protection from the 2016 reduction and receive a temporary reference number, you should apply for a permanent reference number online.

Before you apply for fixed protection, there are a few eligibility conditions that you should be aware of. For example:

1. You are eligible to apply even if you or your employer did not add any money to your pension savings since 5 April 2016.

2. You are eligible to apply even if you chose for any workplace schemes by 5 April 2016.

3. You are eligible to apply for fixed protection 2016 even if you already have individual protection 2014. Under this condition, Fixed protection 2016 will be dormant until you lose your previous protection. This should be informed to HMRC in writing if you lose lifetime allowance protection.

4. You are not eligible to apply if you have:

  • Enhanced protection
  • Primary protection
  • Fixed protection
  • Fixed protection 2014

Before you start

You would need a Government Gateway user ID and password to apply for fixed protection. In case, you do not have a user ID, you can create one while applying.

When you apply for protection from the 2016 reduction and receive a temporary reference number, you should apply for a permanent reference number online.

Lifetime allowance protection is the way to avoid a hefty tax charge on your pension savings if it exceeds the lifetime allowance.

Through LTA protection you can protect benefits from a lifetime allowance charge and prevent paying a hefty tax. The protection locks the lifetime allowance at a certain rate so that the reduction will not apply. Yet, there are a few conditions that, if broken, may cause loss of protection.

What does lifetime enhanced protection mean?

Lifetime allowance enhanced protection came into existence under Finance Act 2004. It was introduced for Individuals, who on 5 April 2006, expected their pension benefits to be exceeding the newly introduced lifetime allowance (LTA) when they intended to withdraw them and wished to prevent an LTA excess charge.

Anyone could apply for enhanced protection, regardless of the value of their funds, until 5 April 2009. Under this protection, a member can take an unlimited amount from their pension arrangements after April 2006 and no lifetime allowance charge will be applicable.

Upon the death of the member, the liability for the LTA charge falls solely on the beneficiary. The process for paying any charge differs from those that occur during a lifetime.

If there is more than one payment or more than one beneficiary any LTA charge is allocated between them.

Moreover, the LTA charge is applicable regardless of whether or not the recipient is a resident or resided in the UK.

The scheme administrator is liable to pay the lifetime allowance death benefits to the beneficiary without deducting an LTA charge. It is applicable under any condition, whether the funds are paid as a lump sum, designated as drawdown or used to purchase an annuity.

Since death is also a benefit crystallisation event, a lifetime allowance test is applicable, where an individual’s pension rights are tested at some point. But a lifetime allowance charge is applicable only if the benefit crystallisation event value entirely or partly exceeds the lifetime allowance available.

UK law provides two protection plans, that are as follows:

1. Individual Protection

Individual Protection 2016 allows an individual to protect their pensions from an additional tax charge whose pension pots were worth more than £1 million on 5 April 2016 or subject to an overall maximum of £1.25 million. It gives them a personalised lifetime allowance based on the value of their pension savings as on 5 April 2016.

2. Fixed protection

Fixed protection protects the member’s lifetime allowance at a specific level based on what version the member holds. Typically, there are three different levels.

They are as follows:

  • Fixed protection 2012 provides LTA of £1.8 million
  • Fixed protection 2014 provides LTA of £1.5 million
  • Fixed protection 2016 provides LTA of £1.25 million

The application dates for Fixed Protection 2012 and 2014 have now closed. The Fixed Protection 2016 is still available.

If your pension savings exceed the lifetime allowance, you have to pay a tax charge of 55%. In case, you choose to take your remaining benefits as income to withdrawals, you will have to pay a tax charge of 25% on each one.

When you take money from your pension pot, 25% is tax-free for once only. If you have taken a 25% tax-free lump Sum, you are no longer entitled to get the same benefit for the remaining fund.

For the maximum tax-free amount taken, you only get the tax-free allowance for one-time.

If you don’t take the lump sum, you can get 25% tax-free on each withdrawal from the pension. Suppose your pension provider allows you to take £10K every year from the pension for 5 years, £2500 of that £10K will be tax-free each year. As a result, only £7500 would be subject to your normal tax rate.

The tax-free amount doesn’t include any of your Personal Allowance. For this amount of income, you don’t have to pay tax.

Usually, your pension statements show your lifetime allowance after subtracting the value of any withdrawals. The calculation of the valuation of pension benefits is based on the type of your pension pot. Here is how it is calculated:

  • Defined Contribution Pension LTA
    The value of the defined contribution pension is determined by the invested amount in it. The performance of your investments over the time period before retiring is also an essential factor. Each time you withdraw money from your pension pot, it will impact the value of your defined contribution pension. This is because the value of your defined contribution pension is directly proportionate to the value of your LTA.
  • Defined Benefit Pension LTA
    Conversely, if you have a final salary or a defined benefit pension, the value is determined on the basis of your salary and the length of the working period with your employer. To calculate the total value of your defined benefit pension, the expected yearly pension is multiplied by twenty.

The lifetime allowance charge is 55% only if the benefits in excess on your pension are taken as a lump sum.

Here are a few ways you can implement:

  • Accelerate your income withdrawals before age 75.
  • Check your eligibility for a higher Protected Lifetime Allowance – Fixed Protection or Individual Protection 2016, based on your current pension circumstances.
  • Calculate, which way is more tax-efficient for you – to draw pension as a lump sum or an income.
  • If you have inherited the pension pot, go for inheritance tax planning. Opt for an LTA test upon death before 75. After the age of 75, there are no LTA tests or charges. Hence, any growth beyond this point is free of tax, which includes inheritance tax.

No, your state pension and overseas pensions do not count towards the lifetime allowance.

The LTA for the 2020/2021 tax year is £1,073,100. It means you can draw as much as £1,073,100 and not pay any allowance charge when you are already retired.

But, if you go above your lifetime allowance, your pension provider will deduct the tax before you start getting your pension.

Moreover, the LTA is a limit on overall pot size, not contributions. Hence, the member can end up breaching the limit and incur excess charges even after they stop contributing to their pensions because of the better investment performance of their pot.

Surely, you should start planning and go for professional advice if you are about to hit the LTA.

When the member passes away, his/her civil partner, spouse, or other beneficiaries may have the right to inherit the pension. However, the pension death benefits are also heavily influenced by the member’s age and the type of pension.

If the pension type is the Defined Contribution pension and Defined Benefit pension, beneficiaries can access the pension based on the previous accessibility to the pension amount.

Under State Pension payments, only a civil partner or a spouse can access the pension after a member’s death.

Yes, spouses do get pensions after the death of the member, under the following conditions:

State Pension
If you already reach State Pension age before 6 April 2016 and you claim your own pension, you are eligible to get any State Pension on the basis of your deceased husband, wife or civil partner’s National Insurance contribution.

If you remarry or form a new civil partnership before you reach State Pension age, you will not be eligible to receive a pension.

Private pensions
You can be eligible for the pension from your deceased husband, wife or civil partner’s workplace, personal or stakeholder pension, based on a pension scheme.

War Widow or Widower’s Pension
You can get War Widow or Widower’s Pension, if your deceased husband, wife or civil partner passes away because of their service in the Armed Forces or due to war.

Yes, the lump sums received on the death of a scheme member are tested against the deceased member’s lifetime allowance. A tax charged on the amount is payable if it exceeds LTA.

Plus, the individuals who have maintained a higher than standard lifetime allowance using enhanced or fixed protection are likely to lose that valuable protection if they receive death benefits through a registered pension scheme.

Every individual gets a single lifetime allowance against which their benefits are tested for the following:

  • Check for income withdrawals
  • Checks for taking lump sums
  • Check if the member reached age 75
  • Check if the member is deceased
  • Check for transferring to a qualifying recognised overseas pension scheme (QROPS)

Looking for instant help? Call Walpole lifetime allowance advisors on this number 020 8786 2112 for the best lifetime allowance protection advice.