Importance of Lifetime Allowance Protection

The many importance of lifetime allowance protection cannot be underestimated and they will be the major concern of this content as we will be taking you through each and every one of them in details for your own benefits. But first, what is called lifetime allowance or can it be similar to the concept of pension?

The lifetime allowance is the total amount you can build up in all your pension savings without incurring a tax charge.

Although there’s no limit on the amount of authorized benefits that can be provided for an individual from their registered pension schemes, there is a limit on the level of tax-privileged benefits. So, effectively, your lifetime allowance determines the amount of benefit you can receive before you have to pay tax on either pension income or lump sums.

The lifetime allowance is the limit on how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits. If you go over the allowance, you’ll generally pay a tax charge on the excess at certain times. Find out what the rules are and how you might be able to protect your pensions from being affected by this allowance.

Importance of Lifetime Allowance Protection

Since it was first introduced in 2006, the lifetime allowance has varied in different tax years. For example, when it was first introduced, the lifetime allowance was £1.5 million – significantly more than the current level. The variations over the years have led HMRC to introduce a number of ‘protections’ which mean that some people are entitled to a personal lifetime allowance that’s higher than the standard lifetime allowance.

In most cases, the people who qualified for protections had already accumulated pension funds in excess of the lifetime allowance amounts when they were introduced. Although the deadlines to apply for some of these protections have already passed, you may be able to apply for more recent protections if your pension fund value exceeded the lifetime allowance when it was revised in the 2014 and 2016 budgets. Find out more about applying for protection from the lifetime allowance charge.

Having briefed you with little preface on allowance, we will be outlining the importance of lifetime allowance protection for you to learn that 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.

Two Types of Protection for Lifetime Allowance

  • 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.

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.

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