This article provides background to the Lifetime Allowance and its application.
1. Standard Lifetime Allowance
The lifetime allowance is designed to limit the total pension savings an individual can accumulate tax-efficiently. Accumulated benefits in excess of the lifetime allowance are taxed at rates which largely remove the tax benefits.
A standard lifetime allowance has applied since A-day, 6 April 2006. This applies unless an individual benefits from one of the transitional protections (see section 2 below).
The standard lifetime allowance was set initially as £1.5 million for tax year 2006/07 and increased over the following four tax years to be £1.8 million in 2010/11.
The standard lifetime allowance was planned to be reviewed quinquennially, with the original intention being that it would increase broadly in line with inflation. The then Labour government announced that the standard lifetime allowance would be capped at its 2010/11 level of £1.8 million for tax years up to and including tax year 2015/16.
Following consultation, the Coalition government announced a reduction in the standard lifetime allowance to £1.5 million from tax year 2012/13 as part of an overall amendment of the pension tax allowances. This level was initially expected to apply at least until tax year 2015/16, after which it would be reviewed again. However, it was announced in the 2012 Autumn Statement that the standard lifetime allowance would be further reduced to £1.25 million with effect from tax year 2014/15, and, in the 2015 July Budget, it was confirmed that it would reduce again to £1 million with effect from tax year 2016/17. It was then announced that, from 6 April 2018, the lifetime allowance will rise again in line with price inflation (CPI). In 2018/19, the lifetime allowance increased to £1.03 million and, in 2019/20, to £1.055 million.
The standard lifetime allowances applying since 6 April 2006 are shown in the table below:
|Tax Year||Standard Lifetime Allowance|
The standard lifetime allowance applies to most death benefits paid before benefits are crystallised (where the member died before age 75) as well as retirement benefits.
Where the value of an individual’s total pension savings exceeds the standard lifetime allowance, the excess will normally be subject to a lifetime allowance tax charge (see our Library Document on Lifetime Allowance Charge), unless transitional protections apply.
2. Transitional Protections
Transitional protections are designed to protect pension savings built up before A-Day or the date of a reduction to the standard lifetime allowance. Where an individual is able to take advantage of certain transitional protections, he or she can be provided with pension benefits with a total value exceeding the standard lifetime allowance without resulting in a lifetime allowance tax charge (or resulting in a reduced lifetime allowance charge).
The transitional protections are:
- Primary Protection – see our Library Document on Primary Protection
- Enhanced Protection – see our Library Document on Enhanced Protection
- Fixed Protection 2012, 2014 or 2016 and Individual Protection 2014 or 2016 – see our Library Document on Fixed and Individual Protection
- Enhanced lifetime allowance – see our library document on Enhanced Lifetime Allowance.
3. Applying the Lifetime Allowance
An individual’s benefits are tested against the standard lifetime allowance on each occasion when there is a Benefit Crystallisation Event (BCE) – normally when retirement benefits are taken, when the member dies or on reaching age 75. At each BCE, a calculation is made of what percentage of the then available lifetime allowance is used up, and if, when added to previous BCEs, the percentage exceeds 100%, a lifetime allowance charge applies. You should refer to your Independent Financial Adviser if you have any questions with regards to the Standard Lifetime Allowance