p_8.gif 0800 70 22 11


What is the Lifetime Allowance?

The UK government announced on 14 October 2010 changes to the Lifetime Allowance (LTA) for tax relief on pensions schemes. From 2012-13 onwards, the LTA for pension savings for individuals has been reduced from the initial level of £1.8 million to £1.25 million.

The LTA is £1.25m in the 2015/16 tax year.  The following table shows the LTA for past and future tax years.

The Lifetime Allowance - 2006/07 to 2015/16
Tax Year Lifetime Allowance
2006/07 £1.50m
2007/08 £1.60m
2008/09 £1.65m
2009/10 £1.75m
2010/11 £1.80m
2012/13/14 £1.50m
2014/15/16 £1.25m
2016/17 £1.00m

At the time of payment, a recovery charge will be applied to the value of retirement benefits in excess of the Lifetime Allowance.  The amount will depend on how the excess is paid.

If it is paid in the form of a pension, the excess will be subject to a 25% tax charge and the income will be subject to Income Tax. For example, if you had a pension fund of £1.9 million in 2006, £400,000 would be subject to the tax charge of 25% (tax due £100,000) leaving £1.8 million to provide an income.

If the excess is paid as a lump sum, it will be subject to a one-off 55% recovery charge.  For example, if you had a pension fund of £1.9 million in 2006, £400,000 would be subject to the tax charge of 55% (tax due £220,000), leaving a lump sum of £180,000.

Your pension scheme's rules may dictate how the excess is paid - either as pension or as a lump sum.

Protecting against the Lifetime Allowance

You can protect yourself against the tax change above if you are have, or are likely to have, retirement benefits valued above the Lifetime Allowance.  There are two ways of doing this.

Primary protection

The value of your retirement benefits at 6 April 2006 will be expressed as a percentage of the £1.5m Lifetime Allowance and that percentage will continue to be exempt from the recovery charge. So, if you had retirement benefits valued at £2.25m on 6 April 2006, you will always be able to have 150% of the limit, whatever level it is, and only incur a charge on the excess.

Enhanced protection

You can cease active membership of your pension schemes on or before 5 April 2006 and be exempt  from the tax charge, as long as you have already built up retirement benefits valued over £1.5m at 6 April 2006.

If you are a member of a defined contribution scheme, including (money purchase, personal and stakeholder arrangements, you cannot pay further contributions on or after 6 April 2006.

If you are a member of a defined benefit scheme (including final salary and career average schemes) you can continue to accrue benefits, but any increase will be tested when retirement benefits come into payment or you transfer.

Valuing retirement benefits

For the purposes of valuing benefits to measure against the Lifetime Allowance, all defined contribution benefits will be taken at their asset value, while pensions building up in defined benefit schemes will be valued at £20 for each £1 of pension, irrespective of the individual's age. For all pensions already in payment, the value will be £25 for each £1 of pension.

Time limit

There was a time limit for applying for Primary or Enhanced protection.  You had until 6 April 2009 to apply to HM Revenue & Customs.  It is now too late to apply for protection.

About our company
Enter a succinct description of your company here
Contact Us
Enter your company contact details here