Pension Taxation: Lifetime Allowance

At its introduction in 2006 the lifetime allowance was set at £1.5 million. It then increased each year up to 2010, when it reached a level of £1.8 million. The lifetime allowance for 2011/12 was £1.8 million and reduced to £1.5 million for 2012/13. It remained at £1.5 million for 2013/14, but for 2014/15 was reduced to £1.25 million. It remained at £1.25 million for 2015/16.

These are the Lifetime Allowance figures in recent years:

06/04/2016 - £1,000,000

06/04/2017 - £1,000,000

06/04/2018 - £1,030,000

06/04/2019 - £1,055,000

06/04/2020 - £1,073,100

When you draw benefits or if you should die before taking any benefits, a calculation called a benefit crystallisation event (BCE) takes place and the value of your benefits are tested against the lifetime allowance.

The LGPS is a defined benefit scheme and as a member of such a scheme the value of your benefits in the LGPS with the Leicestershire County Council LGPS are worked out as follows:

For pensions that start to be drawn on or after 6th April 2006

Your pension is multiplied by a factor of 20 and added to any lump sum (and the value of any additional voluntary contributions - AVCs) you may have:

(Pension x 20) + lump sum + AVCs

The figure arrived at from this calculation is known as the capital value of your benefits.

For pensions already in payment before 6th April 2006

To work out the capital value of these you multiply the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored.

The lifetime allowance is tested against the pension and lump sum amounts that you are going to receive:

• after any pension has been converted for extra lump sum;
• after any benefits have been reduced for members retiring early before normal pension age (NPA);
• after any benefits have been increased for members retiring late (after NPA);
• after the application of a pension debit (on divorce);
• after any deduction made where members have elected to use the annual allowance scheme pays facility;
• after pension increases have been added (where applicable)

As well as your Leicestershire County Council LGPS pension benefits, if you have pension benefits in other pension arrangements you will need to add up the value of these and how much you have across all your pension arrangements.

You do not have to include State pensions or dependants’ pensions.

You are allowed to draw up to 25% (a quarter) of the total value of your pension benefits, or 25% of your remaining standard lifetime allowance, if this is lower.

We will work this out for you close to retirement and let you know when we send out your retirement offer.

Whilst most people aren't affected by the lifetime allowance, there are some members who either are or could be affected by the reduction in the lifetime allowance.

Where we have identified you as such a member solely as a result of your pension savings with Leicestershire County Council LGPS, we will provide you with extra information.

You should take action if the value of your pension benefits is approaching, or more than, the lifetime allowance. As pensions are normally a long term commitment, what might appear modest today could exceed the lifetime allowance by the time you take your benefits. Decisions you make now may mean that you exceed your lifetime allowance and be subject to a lifetime allowance tax charge in future.

If your pension savings are worth more than the current lifetime allowance you may need to protect your pension savings from the lifetime allowance tax charge. See FAQ Are there any protections from the lifetime allowance? for further information.

You can check if you are close to or exceed the lifetime allowance limit with your Leicestershire County Council LGPS benefits by looking at the annual benefit statement we send you for the details of the pension and lump sum (if applicable) you have earned to 31st March and estimated to your NPA. Then use the method outlined in FAQ How and when is my pension tested against the lifetime allowance limit? to work out the capital value of your benefits.

The lifetime allowance covers any pension benefits you may have in all UK tax-registered pension arrangements – not just the LGPS; and some overseas schemes.

You will need to add up the value of your benefits and how much you have across all your pension arrangements (excluding State pensions and dependants’ pensions).

Your pension scheme administrator(s) may already send you information that will help you to find out the value of your combined pension savings. If not you should contact your pension scheme administrator(s) for more information. This information will help you if you need to apply to protect your pension savings from the lifetime allowance tax charge.

When any LGPS benefit, or any other pension arrangement you may have, is put into payment you use up some of your lifetime allowance – so even if your pensions are small and will not be more than the lifetime allowance you should keep a record of any pensions you receive. If you have a pension in payment before 6th April 2006, this will be treated as having used up part of your lifetime allowance.

If you are agreeing salary and pension contribution levels with your employer, increases to the value of your pension benefits based on higher earnings may mean you exceed the lifetime allowance.

You may need to act to protect yourself from a tax charge even if you are not yet nearing retirement.

If you have existing protection but know you may lose this you may also need to consider whether to apply for the new protections. See FAQ Are there any protections from the lifetime allowance? for further information.

Most people will never exceed their lifetime allowance, but if you do you will have to pay an additional tax charge on the excess above the lifetime allowance.

If excess benefits are paid as a pension the charge will be 25%, with income tax deducted at your marginal rate on the ongoing pension payments. If the excess benefits are taken as a lump sum they will be taxed once only at 55%.

If you have a lifetime allowance charge as a result of your Leicestershire County Council LGPS benefits exceeding the lifetime allowance, we make a reduction to your annual pension. The amount of the deduction depends on the amount by which you exceed the lifetime allowance, your gender and your age at retirement.

If you do have a lifetime allowance tax charge, you will be given options at the point of retirement/drawing your benefits about how the charge should be paid.

Yes. Your pension savings may already be protected – these are the existing protections:

When the lifetime allowance was first introduced in 2006 and in subsequent years when the lifetime allowance has been reduced, protections have been put in place for those close to or in excess of the lifetime allowance. Individuals have been able to apply to protect the value of benefits they have built up and future benefits that may accrue from additional tax charges.

These protections are called primary protection, enhanced protection, fixed protection 2012, fixed protection 2014 and individual protection 2014. If you applied to HMRC for lifetime allowance protection, you should have received a certificate to confirm your protection. However you may still be subject to the lifetime allowance charge if you lose this protection.

You can still apply for protection from the 2014 reduction in lifetime allowance until 5th April 2017. See "Individual protection 2014" below for further details.

Each of the existing protections has different conditions attached to them. Information on each of these is available below.

Primary protection

To apply, you must have benefits in excess of £1.5 million at 5th April 2006.

To have primary protection you must have registered for it with HMRC by 5th April 2009.

The value of lifetime allowance protected is individual lifetime allowance factor applied to current lifetime allowance.

There are no limits on benefit growth.

Primary protection is aimed at protecting benefits earned up to 5th April 2006 for those high earners affected by the introduction of the lifetime allowance from 6th April 2006. For example, those whose benefits at 5th April 2006 already had a capital value in excess of the 2006/07 lifetime allowance of £1.5 million.

If the value of your pension benefits at 5th April 2006 was more than the 2006/07 lifetime allowance of £1.5 million and you have registered for primary protection, you have an individual lifetime allowance based on how much your benefits at 5th April 2006 exceeded the value of the 2006/07 standard lifetime allowance. Your individual lifetime allowance increases at the same rate as the standard lifetime allowance. So, if your benefits at 5th April 2006 exceeded the 2006/07 standard lifetime allowance by 10%, your individual lifetime allowance will always be 10% higher than whatever the standard lifetime allowance is in future years.

If your pension rights are shared on divorce or dissolution of a civil partnership this will result in the individual lifetime allowance being reduced (or lost if it reduces to below the standard lifetime allowance).

Enhanced protection

Anyone could apply (but was best suited to those near retirement).

To have enhanced protection you must have registered for it with HMRC by 5th April 2009.

The value of lifetime allowance protected is value of benefit is less than or more than £1.5 million at 5th April 2006.

There are limits on benefit growth.

You could register for enhanced protection (as well as primary protection) if the value of your pension benefits at 5th April 2006 was more than the 2006/07 lifetime allowance of £1.5 million.

You could also register for enhanced protection if you believed the value of those benefits might in the future be more than the standard lifetime allowance or if you believed your pension benefits in any one year would increase by more than the annual allowance.

Under enhanced protection you will not pay tax on benefits in excess of the lifetime allowance provided your benefits at retirement do not exceed the value of your benefits at 5th April 2006 as increased after then, in general terms, by the greater of:

• 5% each year; or
• the increase in the cost of living; or
• increases in your pensionable pay.

If the limit is exceeded you will pay tax on the excess.

You will lose enhanced protection if you pay contributions into a money purchase pension arrangement (for example, pay into the LGPS arranged AVC facility – see FAQ

Are there any implications of making additional voluntary contributions if I have lifetime allowance protections?) or if you start a new pension arrangement, or if you transfer your LGPS benefits to another defined benefit pension scheme. You can also voluntarily give up enhanced protection by giving notice that you no longer wish to keep it.

If you lose enhanced protection you must notify HMRC within 90 days. Failure to do so could result in a fine of up to £3,000.

There is currently uncertainty over the new career average scheme and the impact on enhanced protection.

Fixed protection 2012

Anyone could apply (but was best suited to those near retirement).

To have fixed protection 2012 you must have applied to HMRC in their prescribed form on or before 5th April 2012.

The value of lifetime allowance protected is £1.8 million.

There are limits on benefit growth.

The lifetime allowance reduced to £1.5 million in 2012/13 and a new fixed protection was introduced. You can't have fixed protection 2012 if you have either primary protection  or enhanced protection . With fixed protection 2012 your lifetime allowance is fixed at £1.8 million.

The maximum tax free lump sum you can take on retirement is the lesser of:

• 25% of the capital value of your LGPS benefits, or
• 25% of the lifetime allowance which, for those with fixed protection 2012, is £450,000 (for example, 25% of your lifetime allowance of £1.8 million) less the value of any other pension rights you have in payment.

You will lose fixed protection 2012 if you start a new pension arrangement, other than to accept a transfer of existing pension rights, or if your benefits increase by more than the cost of living increases, or if you pay contributions into a money purchase pension arrangement other than to a life assurance policy providing death benefits that started before 6th April 2006. You will also be subject to restrictions on where and how you can transfer benefits.

If you lose fixed protection 2012 you must notify HMRC within 90 days. Failure to do so could result in a fine of £300 and a penalty of up to £60 per day after the initial fine has been issued until you supply them with the required notification.

There is currently uncertainty over the new career average scheme and the impact on fixed protection.

Fixed protection 2014

Anyone could apply (but was best suited to those near retirement).

To have fixed protection 2014 you must have applied to HMRC in their prescribed form on or before 5th April 2014.

The value of lifetime allowance protected is £1.5 million.

There are limits on benefit growth.

The lifetime allowance reduced to £1.25 million in 2014/15 and a new protection called fixed protection 2014 was introduced. You can't have fixed protection 2014 if you already have primary protection , enhanced protection  or fixed protection 2012. With fixed protection 2014 your lifetime allowance is fixed at £1.5 million.

The maximum tax free lump sum you can take on retirement is the lesser of:

• 25% of the capital value of your LGPS benefits, or
• 25% of the lifetime allowance which, for those with fixed protection 2014, is £375,000 (for example, 25% of your lifetime allowance of £1.5 million) less the value of any other pension rights you have in payment.

You will lose fixed protection 2014 if you start a new pension arrangement, other than to accept a transfer of existing pension rights, or if your benefits increase by more than the cost of living increases, or if you pay contributions into a money purchase pension arrangement other than to a life assurance policy providing death benefits that started before 6th April 2006. You will also be subject to restrictions on where and how you can transfer benefits.

If you lose fixed protection 2014 you must notify HMRC within 90 days. Failure to do so could result in a fine of £300 and a penalty of up to £60 per day after the initial fine has been issued until you supply them with the required notification.

There is currently uncertainty over the new career average scheme and the impact on fixed protection.

Individual protection 2014

To apply, you must have benefits in excess of £1.25 million at 5th April 2014.

Application for this protection was only open until 5th April 2017.

The value of lifetime allowance protected is value of benefits at 5th April 2014 (max £1.5 million).

There are no limits on benefit growth.

The lifetime allowance reduced to £1.25 million from 6 April 2014 and a new protection called individual protection 2014 was introduced.

You can choose to protect any pension savings built up before 6th April 2014 from the lifetime allowance charge (subject to an overall maximum of £1.5 million), by applying for individual protection 2014.

If you have pension savings of over £1.25 million on 5th April 2014 you can apply for individual protection 2014 as long as you don’t have primary protection. You can apply for individual protection 2014 if you hold open enhanced protection, fixed protection 2012 or fixed protection 2014, but the individual protection 2014 will lie dormant until such time as enhanced protection, fixed protection 2012 or fixed protection 2014 is lost – at which time individual protection 2014 will move to open.

Individual protection 2014 will give you a protected lifetime allowance equal to the value of your pension savings on 5th April 2014 subject to an overall maximum of £1.5 million. You will not lose individual protection 2014 by making further savings in to your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge when you draw your benefits (a BCE takes place).

Individual protection is available even if your pension savings on 5th April 2014 have a value of more than £1.5 million. Any pension savings in excess of this will not be protected and subject to the lifetime allowance charge when you draw your benefits (a BCE takes place).

If at some time in the future the level of the standard lifetime allowance is higher than the level of the personalised lifetime allowance, the individual protection 2014 will cease to apply and the individual will revert to the higher standard lifetime allowance.

You can apply for individual protection 2014 until 5th April 2017. This means that your application for this protection must be received by HMRC no later than this date. You must have applied for protection and have it in place before you draw your pension if you want to rely on the protection at your retirement.

HMRC have introduced a new online self-service where you must apply for protection. This service can be accessed here:

Protect your lifetime allowance (GOV.UK)

To apply, you will need an HMRC Online Services account. To create an account, or to login to an existing one, you should go to:

HMRC services: sign in or register (GOV.UK)

Members who are unable to use the online service can phone HMRC’s pensions helpline for help on 0300 1231079.

Once you have successfully applied for protection, you will be provided with a permanent protection notification number and pension scheme administrator reference number which you will need to keep. You will also be able to print details of your protection status. You will no longer receive a lifetime allowance protection certificate.

If, at any time after you have successfully applied for protection, your pension rights become subject to a pension debit as a result of a divorce, you must inform HMRC about this within 60 days of the date of the pension debit. If you do not provide this information you may be liable to penalties. HMRC will then either issue you with a replacement certificate, which will supersede the first certificate, or may revoke your certificate entirely if the value of your pension rights following the debit has fallen below the standard lifetime allowance.

Transitional protection: Lump sums

If you were in the LGPS before 1st April 2008, you will be entitled to an automatic lump sum from the LGPS when you draw your benefits, in addition to your pension. There are two types of lump sum protection available. These relate to members who, at 5th April 2006, had either:

• built up a lump sum of £375,000 or more and the member has applied for primary protection and/or enhanced protection, or
• built up a lump sum that was more than 25% of the value of any pension rights not in payment at that time.

It is expected that very few (if any) LGPS members will have built up lump sums that meet either of these limits.

You can find more information about the existing protections and when these may be lost at Tax on your private pension contributions

What do I need to do to protect my pension savings? 2016 protection

Lifetime allowance protection regimes are available to protect your pension savings now that the lifetime allowance has reduced to £1 million from 6th April 2016. There are two new protection regimes, known as fixed protection 2016 and individual protection 2016 and these have similar conditions to fixed protection 2014 and individual protection 2014. Information about these new protections is available below.

You can now apply to HMRC for one of two new protections from the reduction in the lifetime allowance to £1 million from 6 April 2016. These are known as fixed protection 2016 and individual protection 2016.

Fixed protection 2016

• Anyone can apply (but best suited to those near retirement)
• You have to have stopped building up benefits by 5th April 2016 to apply
• No application deadline
• The value of lifetime allowance protected is £1.25 million
• There are limits on benefit growth

Individual protection 2016

• To apply, you must have benefits in excess of £1 million at 5th April 2016
• Cannot apply if already hold primary protection or individual protection 2014
• No application deadline
• The value of lifetime allowance protected is value of benefits at 5th April 2016 (max £1.25 million) (see link below for help with this)
• There are no limits on benefit growth

There is further information about how to value your benefits for the purpose of applying for individual protection via the following link: Value your pension for lifetime allowance protection (GOV.UK)

For more information about the new protections, please refer to: Protect your lifetime allowance (GOV.UK)

Applying for new protections

HMRC have introduced a new online self-service where you must now apply for protection. This service can be accessed here: Protect your lifetime allowance (GOV.UK)

To apply, you will need an HMRC Online Services account. To create an account, or to login to an existing one, you should go to: HMRC services: sign in or register (GOV.UK)

Members who are unable to use the online service can phone HMRC's pensions helpline for help on 0300 1231079.

Once you have successfully applied for protection, you will be provided with a permanent protection notification number and pension scheme administrator reference number which you will need to keep. You will also be able to print details of your protection status. You will no longer receive a paper lifetime allowance protection certificate. Instead, you will be able to view and print your protection details online.

There is no deadline to apply for these new protections however you must have your protection in place before you take your benefits if you want to rely on it at retirement.

Temporary reference numbers

If you have applied for protection using the interim application process and been issued with a temporary reference number, you should re-apply by following the process outlined above and using the new online self-service to obtain a permanent reference number which you will need if you want to rely on continued protection in the future.

In November 2016, HMRC added a function to the Lifetime Allowance Online Service for members to amend the details of their protection online.

If you protected your pension savings using the online application you can now:

• amend the amounts entered when you applied for individual protection 2014 (IP2014) and individual protection 2016 (IP2016) if you have made a mistake;
• add or amend a pension debit because you received a discharge notice as a result of a pension sharing order. This must be done within 60 days of receiving the notice.

If you did not protect your pension savings online but still need to make amendments, you can do this by writing to HMRC to tell them about the changes and HMRC will write to let you know how any changes affect your pension.

If you have lost your protection you will need to tell HMRC in writing. You should include the following information:

• Your full name, address and national insurance number;
• The exact date that you lost protection;
• The reason why protection was lost (benefit accrual, auto-enrolment etc.);
• The type of pension arrangement (defined contribution or defined benefit);
• Your original lifetime allowance protection certificate, where relevant.

If you have a paper lifetime allowance protection certificate, you will need to send this with the information needed to HMRC by post.

If you applied for protection online and don’t have a certificate, this information can be provided to HMRC by email.

If you have fixed protection 2016, you need to be aware that you will lose your protection if your employer automatically re-enrolls you into the pension fund under the Pension Act 2008. To avoid losing your protection you will need to opt back out of the fund.

There are 7 issues to consider:

1. Convert pension to lump sum

The capital value of your benefits reduces if you choose to take a bigger lump sum. When you retire, you can choose to give up (convert) some of your pension to increase your tax free lump sum. If you choose this option, every £1 of pension will give you an extra £12 of lump sum. Even if you are unable to reduce the capital value of your benefits to within the lifetime allowance limit, you can still reduce the value of any potential lifetime allowance charge in this way.

2. Early retirement

Also, if you retire early with an actuarial reduction to your benefits, the capital value is tested against your reduced benefits. This can have the effect of reducing your lifetime allowance charge.

3. Do you pay additional voluntary contributions (AVCs)?

If you are making AVCs you may wish to consider your position and the level of AVCs you are paying.

4. Move to 50/50

If you are an active member, you may decide to move into the 50/50 option of the scheme.

This is a way of reducing your accrual while remaining in the scheme – half contribution and half future accrual. This could reduce or remove a tax charge. With this option, there are annual allowance implications too.

5. Opt out

If you are an active member, you may decide to stop contributing to the LGPS and opt out. Before taking this course of action, some things to consider are:

• Balance of contributions versus tax charges on excess
• Impact of CPI versus career progression
• Valuable benefits that membership of the LGPS offers, for example, life cover of 3 times your pay and accruing additional pensions for eligible dependants if you die, ill health and redundancy cover.

6. Remain in scheme

No change to accrual, but accept any tax charge.

7. Protections

For details about if and how you can protect your pension savings see FAQ Are there any protections from the lifetime allowance?

If you have applied for lifetime allowance enhanced protection, fixed protection 2012 or fixed protection 2014 from HMRC, or if you are intending to apply for fixed protection 2016, you will lose that protection if you pay AVCs. You may not lose this protection if you are paying AVCs at 5th April 2006 purely for extra life cover and the terms of the policy have not varied significantly since then.

Yes. The lifetime allowance is tested against the pension and lump sum amounts you are going to receive including any added years or extra pension that you have bought.

Examples of extra pension are where you have taken out either an additional regular contributions (ARC) or an additional pension contributions (APC) contract.