The UK Lifetime Allowance (LTA) is a limit imposed by HMRC on the total accumulated pension anyone is entitled to before tax relief is reclaimed. There are different factors that may apply to you;

Lifetime allowance (LTA) was brought in following A-day (6th of April 2006) when pension rules went through radical changes to simplify them. This pension simplification included limiting the amount of tax relief individual pension holders were entitled to both on an annual basis and a cumulative basis (LTA). To ensure that those who had already accumulated pensions in excess of this new limit protection measures were adopted to cover existing accrued benefits

Lifetime Allowance (LTA) limits

Pensions: LTA - Lifetime Allowance limits: Tax year 2016/2017 £1 million expected; tax year 2015/2016 £1.25 million; tax year 2014/2015 £1.25 million; tax year 2013/2014 £1.5 million; 2012/2013 £1.5 million; 2011/2012 £1.8 million; 2010/2011 £1.8 million; 2009/2010 £1.75 million; 2008/2009 £1.65 million; 2007/2008 £1.6 million; 2006/2007 £1.5 million

Revert to LTA topic list

Any pensions you hold, whether defined benefit (final salary)  or defined contribution (money purchase) schemes, are measured against the LTA only once, which occurs at one of the following scenarios known as benefits crystallisation events;
 

The measurement involves calculating the pension’s value against the relevant lifetime allowance rate accounting for any protection to establish a percentage. This percentage is added to any previous pensions that you have had assessed against LTA to determine whether or not you have exceeded the allowance. If 100% is exceeded you will be liable for a lifetime allowance excess tax charge.
 
The pension value is dependent on the type of pension you hold;
 

Primary and enhanced protection applied to pension valuations as at the 6th of April 2006. It is possible to hold both and if you lose your enhanced protection you will still be entitled to primary protection. Both are based on a percentage of your original pension value against the lifetime allowance applicable at the time. Fixed protection, in comparison, sets the level of your lifetime allowance at older higher levels than is currently the case whilst individual protection are for those who intend to still contribute into a pension scheme.
 
Each form of protection has a time limit in which it can be applied for so, if it is beneficial, ensure that the necessary procedures are performed in a timely manner
This protection covered those who held pensions in excess of the 2006/2007 lifetime allowance of £1.5 million. The protection figure is a percentage of your pension value as at the 6th April 2006 compared to the LTA. This figure would then be applied to the standard LTA rate when a benefit crystallisation event occurs to establish the relevant LTA rate for you.
 
Once applied for, primary protection cannot be lost or reduced except in the event of a pension debit. This applies in divorce where part of a pension is transferred to your ex-spouse. For example, if your pension was £3 million the increase factor is 1 ((3 – 1.5)/1.5). If 25% was transferred to your ex-spouse then the new factor would be 0.5 ((2.25-1.5) / 1.5). Your LTA rate this year would therefore be £1.875 million (0.5 x 1.25 million (tax year 2015/2016) + 1.25 million)
This protection could be applied for whether your pension exceeded the 2006/2007 LTA limit or you expected it to exceed the LTA rate in future. The protection figure is based on your pension value as at the 6th of April 2006 and increased by the greater of;
 

One condition is that no additional contributions can be made into any pension scheme in the future. Doing so will forfeit your enhanced protection. Under both cases, individuals should have already applied to HMRC and be in receipt of a certificate

Following the reduction of lifetime allowance limit in 2012 & 2014 it was possible to apply for fixed protection. This allowed you keep the previous higher rate (either £1.8 million or £1.5 million) rather than having your pension assessed against the current lower rate (£1.25 million). Even if you hold this protection you will still be entitled to any future increases of the standard LTA rate if it takes you above your protected figure.
 
As with enhanced protection you can no longer make any future pension contributions and you should have already applied and be in receipt of this protection.
 
Fixed protection 2016 applies the same principles as fixed protection 2012 & 2014, namely that the higher rate of £1.25 million will apply rather than the newer lower rate of £1 million. It is expected that any future reductions in the lifetime allowance limit will offer this form of protection securing the higher rate limit as applicable at the time
This is the most flexible form of protection since it still allows you to contribute into a pension scheme. Your personal lifetime allowance rate will be set according to your combined pension values as at the 5th April 2014 with a maximum of £1.5 million. Any increase in pension assets in excess of this value will be subject to an LTA surcharge tax.
 
Individual protection is not available to those who hold primary protection since it the latter provides a higher level of coverage. The key reason someone may have individual rather than fixed protection is if they cannot be compensated for stopping pension contributions and have a pension value in excess of £1.25 million. It is, however, possible to have both fixed and individual protection
 
Individual protection 2016 works on the same principle as the previous version fixing your personal LTA rate as at the 5th of April 2016 subject to it being between the new limit of £1 million and the current limit of £1.25 million. It is expected that any future reductions in the lifetime allowance limit will offer this form of protection securing a higher level of protection for individuals as applicable at the time
If you exceed the LTA limit your excess pension value is charged at the following rates;
 

In the case of a QROPS pension transfer (BCE 8) it is assumed that any income withdrawal will still be subject to tax. The applicable LTA tax charge is therefore based on the regular payment rate.
 
Any necessary payment will be made to HMRC prior to the funds being released

Revert to LTA topic list

Lifetime allowance calculator

Lifetime allowance calculator (LTA). LTA is measured at the point of a benefit crystallisation event (BCE): when you reach 75; access part or all of a pension; transfer pension into a QROPS or on death. Lifetime allowance calculation LTA1 = LTA0 + (PV/limit x 100). Tax is due when LTA1 > 100%. Tax due = (LTA1 - 100%) x limitLifetime allowance calculator (LTA)… where LTA1 = new LTA expressed as a percentage, LTA0 = old LTA, PV = pension value, limit = the higher of standard LTA or your personal LTA due to protection. Calculating PV is dependent upon the type of pension held. Defined benefit (final salary) = 25 x annual income pre 6th April2006 & 20 x annual income + lump sum post 2006. Pension in capped drawdown pre 6th April 2006 value = 20 x maximum annual drawdown when funds changed to flexible access)Lifetime allowance (LTA) calculator… for defined contribution schemes pension value = total pension valuation. On the first instance of a benefit crystallisation event (BCE) Pension Value (PV) = Pension value of DB schemes in payment + pension value of previously held capped drawdown pensions + value of any DB or DC scheme which triggers a BCE. On all subsequent instances of BCE PV = value of any DB or DC scheme which triggers a BCE

Revert to LTA topic list

[Total: 11    Average: 4.8/5]

 

Pensions: Lifetime Allowance (LTA) written by Don MacRitchie average rating 4.8/5 - 11 user ratings