Lifetime Allowance

There is a limit on the value of retirement benefits that you can draw from approved pension schemes before tax penalties apply. That limit is called the Lifetime Allowance.

The Lifetime Allowance is £1 million in the 2016/17 tax year. The following table shows the Lifetime Allowance for past and future tax years.

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 £2.0 million in 2015, £750,000 would be subject to the tax charge of 25% (tax due £187,500) leaving £1.812,500 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 £2.0 million in 2015, £750,000 would be subject to the tax charge of 55% (tax due £412,500), leaving a lump sum of £337,500.

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

The Lifetime Allowance

*Tax Year*	*Lifetime Allowance*
2006/07	£1,500,000
2007/08	£1,600,000
2008/09	£1,650,000
2009/10	£1,750,000
2010/11	£1,800,000
2011/12	£1,800,000
2012/13	£1,500,000
2013/14	£1,500,000
2014/15	£1,250,000
2015/16	£1,250,000
2016/17	£1,000,000

Protection

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 & Enhanced Protection

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.

Time Limit & Fixed Protection 2014

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.

Fixed Protection 2014
From 6 April 2014 the lifetime allowance will be reduced to £1.25 million. A new form of protection called fixed protection 2014 is being introduced to protect those who have built up pension pots of more than £1.25m but no more than £1.5 million. People will be able to apply for fixed protection 2014 from August 2013.