Lloyds of London

Pensions briefing - Lifetime allowance and protections

Publication February 2017


Introduction

Since A Day (6 April 2006), a lifetime limit has applied to the value of UK tax-privileged benefits that may be taken from pension arrangements.  This lifetime allowance applies in respect of benefits paid from all HM Revenue & Customs (HMRC) registered pension arrangements. The amount of the lifetime allowance has varied since it was introduced, and has been maintained at the same level or reduced in successive tax years since the 2011-2012 tax year. Given these changes, a number of protections have been put in place for members who would or might be affected by the reductions.  This briefing summarises these protections, how they can be obtained and how they can be lost.

Lifetime allowance

The vast majority of benefits payable from registered pension arrangements are tested against a member’s lifetime allowance, including pensions, pension commencement lump sums, death benefits and overseas transfers.  The capital value of each such benefit is assessed against the remaining amount of the member’s lifetime allowance at the time of payment.  A charge is payable on any excess above the lifetime allowance.  This charge, which is in addition to any tax that is payable by the recipient of the benefit, is 25 per cent of the excess if the benefit is paid as a pension or 55 per cent of the excess if the benefit is paid as a lump sum.

The standard lifetime allowance amounts for the tax years since A Day are as follows:

Tax years              Lifetime allowance
 2018-2019 onwards  £1,000,000 plus CPI 
 2017-2018  £1,000,000
 2016-2017  £1,000,000
 2015-2016  £1,250,000
 2014-2015  £1,250,000
 2013-2014  £1,500,000
 2012-2013  £1,500,000
 2011-2012  £1,800,000
 2010-2011  £1,800,000
 2009-2010  £1,750,000
 2008-2009  £1,650,000
 2007-2008  £1,600,000
 2006-2007  £1,500,000

 

Protections

In order to lessen the impact of the introduction of the lifetime allowance and the reductions that have taken place since the 2011-2012 tax year for members who would or might be affected by the changes, a number of protections have been put in place.  These are summarised in the below table:

ProtectionEligibilityFeaturesApplication deadlineFurther accrual possible?
Primary protection Accrued benefits worth more than £1.5m immediately before A Day Applies to pre-A Day pension rights and Pre-A Day lump sum rights exceeding £375,000

Member’s lifetime allowance is increased by a factor relating to the proportion by which his benefits were greater than £1.5m immediately before A Day

5 April 2009  Yes
Enhanced protection Accrued benefits of any value immediately before A Day Applies to pre-A Day pension rights and Pre-A Day lump sum rights exceeding £375,000

Member’s lifetime allowance is disapplied

5 April 2009 No (subject to indexation)
Fixed protection 2012

Expectation that benefits at time of payment will exceed £1.5m

Member does not have primary protection or enhanced protection

Applies to pre-6 April 2012 pension rights

Member’s lifetime allowance is fixed at £1.8m

5 April 2012 No (subject to indexation)
Fixed protection 2014 Expectation that benefits at time of payment will exceed £1.25m Applies to pre-6 April 2014 pension rights

Member’s lifetime allowance is fixed at £1.5m

5 April 2014 No (subject to indexation)
Individual protection 2014

Accrued benefits of more than £1.25m on 5 April 2014

Member does not have primary protection

Applies to pre-6 April 2014 pension rights

Member’s lifetime allowance is the value to his benefits on 5 April 2014 (subject to maximum of £1.5m)

5 April 2017 Yes
Fixed protection 2016 Expectation that benefits at time of payment will exceed £1.25m

Member does not have primary protection, enhanced protection, fixed protection 2012 or fixed protection 2014

Applies to pre-6 April 2016 pension rights

Member’s lifetime allowance is fixed at £1.25m

May be claimed on or after 6 April 2016 No (subject to indexation)
Individual protection 2016

Accrued benefits of more than £1m on 5 April 2016

Member does not have primary protection or individual protection 2014

Applies to pre-6 April 2016 pension rights

Member’s lifetime allowance is the value to his benefits on 5 April 2016 (subject to maximum of £1.25m)

May be claimed on or after 6 April 2016 Yes 

Application for protections

A member may apply to HMRC for any of the above protections, provided that he satisfies the appropriate eligibility criteria and the deadline for application has not passed.  Applications for protection may be submitted to HMRC online.  If the application is successful, a reference number will be provided to the member, which he should pass on to the trustees or administrators of his registered pension arrangements.

Loss of protection

Once a member has obtained one (or more) of the above protections, it is possible that they may fall away upon the occurrence of certain events. 

Broadly, it is only possible for a member to lose primary protection or either of the individual protections if a pension sharing order causes the value of the member’s benefits to fall below a specified amount.

There are, however, a number of ways in which a member may lose enhanced protection or any of the fixed protections.  If a protection is lost, the member must inform HMRC of the loss within 90 days.  Broadly, these protections will be lost if:

  • the member accrues any further benefits under a registered pension arrangement (this includes any member or employer contributions to a defined contribution arrangement and any accrual under a defined benefit arrangement other than deferred pension revaluation);
  • the member joins a new registered pension arrangement under an existing or new pension scheme (although there are exceptions to this, such as where the arrangement is joined for the purpose of receiving a recognised transfer);
  • the member’s pension arrangement receives an “impermissible transfer” (such as a transfer of assets that were not held under a pension scheme or which do not relate to the member; or
  • the member’s pension arrangement makes a non-permitted transfer (such as to a non-registered pension arrangement or to a non-recognised overseas pension scheme). 

The requirement for employers to automatically enrol workers into an appropriate pension arrangement and make contributions raises the possibility that some such workers may lose inadvertently enhanced protection or any of the fixed protections.  Unless any such workers who have these protections opt-out of the pension arrangement within one month of joining (so that they are treated as not having the joined), they will lose the protection.  Since 1 April 2015, however, employers have not been required to automatically enrol workers if they have reasonable grounds to believe a worker has claimed one of these protections.


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