When an individual's benefits come into payment (a benefit crystallisation event) they will be tested against a ceiling known as the lifetime allowance.
The standard lifetime allowance for tax year 2020/21 is £1.0731 million and is frozen at this limit until April 2026. For tax year 2019/20, it was £1.055 million; for 2018/19, it was £1.03 million and for tax year 2017/18, it was £1.00 million.
Provided the value of all an individual's benefits from all Registered Pension Schemes which are put into payment do not exceed their remaining lifetime allowance there should be no tax penalty.
However, when benefits are put into payment and the total value of the fund used to provide the benefits exceeds the individual's remaining lifetime allowance, there will be a tax charge on the excess of 25% if the excess is used to provide a drawdown pension or to buy an annuity, or 55% if the excess is taken as a lump sum (an option that is only available up to age 75).
Lifetime allowance protection was introduced to prevent individuals with previously accumulated pension savings under existing regimes being disadvantaged should their funds exceed subsequent reductions in the standard lifetime allowance.
The main forms of protection are:
For BCEs on after 6 April 2014, the amount of primary protected lifetime allowance used up by prior BCEs will need to be adjusted to take into account changes in the standard lifetime allowance over time. The calculation of the adjustment will depend on whether the prior BCE occurred between 6 April 2006 and 5 April 2014, or after 5 April 2014.
Where the previous BCE was on/after 6 April 2014, apply the % of lifetime allowance used at that BCE to the current standard lifetime allowance (£1,073,100 for tax year 2021/22).
More on primary protection
This gives a personal lifetime allowance of £1.25 million.
more on fixed protection 2016
If at any time the standard lifetime allowance exceeds a member’s personal lifetime allowance, the standard lifetime allowance will then apply instead.
It is possible for a member to have more than one form of lifetime allowance protection.
Other forms of protection include enhancement factors in respect of pension credits received following a pension sharing order on divorce and transfers received from a qualifying recognised overseas pension scheme (QROPS).
There are currently only two types of lifetime allowance protection which individuals can still apply for:
Whatever your retirement needs, one of our experts will be happy to discuss how we can help you achieve your goals.