The lifetime allowance
The lifetime allowance is the total value of all pension benefits you can have without having to pay extra tax. If the value of your pension benefits when you take them is more than the lifetime allowance, or more than any protections you may have, you will have to pay tax on the excess benefits. This does not include any state pension, state pension credit or any partner’s or dependant’s pension you are entitled to.
The lifetime allowance covers any pension benefits you have in all tax-registered pension arrangements – not just the LGPS.
Your lifetime allowance 02:56
Tax rules limit how much pension you can build up over your lifetime without having to pay a tax charge. This video explains how the lifetime allowance works.Download transcript
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The lifetime allowance has changed a number of times since 2011. The Government has announced that it will stay at its current level until the 2025/26 year.
|Tax year||Lifetime allowance|
|2020/21 to 2025/26||£1,073,100|
How is the lifetime allowance calculated?
Each time you take payment of a pension benefit, the capital value of the benefits you are taking uses up a percentage of your lifetime allowance. Even if your pensions are small, you should keep a record of every pension you receive.
The capital value of pensions that you take after 5 April 2006 is your annual pension multiplied by 20, plus any lump sum you take from the pension scheme. If you have a pension that was first paid before 6 April 2006, this will also be treated as using up part of your lifetime allowance. For these pensions, the capital value is the current annual pension multiplied by 25. Any lump sum you received is ignored.
You can use the Lifetime allowance quick check tool to estimate how much of the standard lifetime allowance your LGPS pension savings will use.
When you take your benefits, if the capital value of those benefits is more than your available lifetime allowance, you will have to pay tax on the excess. If your excess benefits are paid as a pension, the tax charge will be 25% of the excess. The ongoing pension payments will also be subject to income tax. If you take the excess benefits as a lump sum, they will be taxed once at 55%.
You can choose to pay the tax immediately by a reduction to your lump sum, pay the tax directly to HMRC yourself or you can ask the scheme to pay the tax for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit.
Changes to the lifetime allowance
The lifetime allowance reduced from £1.25 million to £1 million in 2016. The Government introduced two protections called Fixed Protection 2016 and Individual Protection 2016. These protections are the same in design as Fixed and Individual Protections 2014 which were introduced when the lifetime allowance reduced in 2014.
Individual Protection 2016
You can apply for Individual Protection 2016 if the value of your pension savings on 5 April 2016 was more than £1 million. You can’t apply if you have Primary Protection.
Individual Protection 2016 gives a protected lifetime allowance equal to the value of your pension rights on 5 April 2016, up to a maximum of £1.25 million. You will have to pay tax on any pension savings in excess of your protected lifetime allowance.
Fixed protection 2016
You can apply for Fixed Protection 2016 if you expect your pension savings to be more than £1 million when you take them after 6 April 2016. With Fixed Protection 2016, your lifetime allowance is fixed at £1.25 million.
Fixed Protection 2016 is lost if your benefits increase by more than the cost of living in any tax year. The cost of living increase in 2016/17 was zero. You can only hold Fixed Protection 2016 if your LGPS membership ended before 6 April 2016. If you remained a member after 6 April 2016, you would have lost this protection.
You will also lose Fixed Protection if you:
- start a new pension arrangement, other than to accept a transfer of existing pension rights
- pay into a money purchase pension arrangement, other than to a life assurance policy that you started before 6 April 2006
- transfer your pension, except in limited circumstances.
If you lose Fixed Protection, you must let HMRC know within 90 days of the date you could first reasonably be expected to have known about the loss.
You can’t have Fixed Protection 2016 of you already have Primary or Enhanced Protection, Fixed Protection 2012 or Fixed Protection 2014.
Applying for Fixed and Individual Protection 2016
You can protect your pension lifetime allowance by applying to HMRC for Fixed or Individual Protection 2016. There is no deadline for making an application. However, you will need to inform HMRC of the value of your pension savings on 5 April 2016 to apply for Individual Protection 2016. Your pension administrator was only obliged to provide you with this information up to 5 April 2020.
If you successfully apply for protection, the online service will provide you with a reference number that you must keep. You must apply before you take your pension as you will need to give your pension administrator this reference.
When the Government introduced the lifetime allowance in 2006, and when it reduced in 2012 and 2014, it introduced protections for members with large pension pots. If you have applied for a previous protection such as Enhanced Protection, Primary Protection, Fixed Protection 2012 or 2014, or Individual Protection 2014, you should have received a certificate to confirm your protection.
You may still be subject to a lifetime allowance charge if your pension exceeds your protected amount or if you lose your protection.
You can find out more about Tax on your private pension contributions, these protections and when you may lose them on the Government website.
Taking a tax-free lump sum
The maximum tax-free lump sum you can have when you take your pension is the lowest of:
- 25% of the capital value of your LGPS pension
- 25% of the lifetime allowance
- 25% of your remaining lifetime allowance if you have already taken payment of pension benefits.
What to do if you think you might be affected
Before taking any action to reduce your pension liabilities, you should always seek independent financial advice from an adviser registered with the Financial Conduct Authority. MoneyHelper can help you choose a financial adviser.
You may also wish to consider:
- Exchanging annual pension for lump sum at retirement can reduce the capital value of your LGPS benefits
- If you wish to slow down your pension build-up, joining the 50/50 section of the LGPS allows you to pay half your normal contributions to build up half your normal pension. You would retain full ill health and life cover.
- If you opt out of the LGPS with a right to a deferred benefit, you will not be able to combine those benefits with your new pension account if you re-join the LGPS.
Contact your pension fund if you any questions about your LGPS membership or benefits.