Although it was introduced as part of “pension simplification” in April 2006, I think most would agree that the lifetime allowance (or LTA as it is often referred) – and the planning that surrounds it – is actually far from being simple and straightforward.
This is especially so given the constant changes made to the allowance over the years. When it was introduced on 6 April 2006, the standard allowance was set at £1.5 million with a schedule of increases planned for every tax year. And that is exactly what happened until the 2010/11 tax year, by which time the standard LTA had increased to £1.8m. But that is as high as the allowance ever got.
Until this point, LTA planning was seldomly discussed as it affected such a small proportion of the population. However, since the end of the 2011/12 tax year, the standard LTA has been reduced significantly. By April 2016 it was set at just £1 million but from 2018/19, it started to increase each tax year in line with consumer price inflation (CPI) to reach the current level of £1,073,100. However, in the Spring 2021 budget, the Chancellor of the Exchequer announced that the LTA would not be increased any further until at least April 2026.
Given this backdrop, it’s understandable why the number of individuals affected by the LTA has grown significantly over the years and why it is often a key consideration for advisers as part of their financial planning with clients.
Although there is no limit on the value of authorised benefits that a pension scheme can provide to its members, each individual has a single lifetime allowance. This allowance relates to the amount of tax-privileged savings that the person can draw (or crystallise as we refer to it) from their pension schemes before a tax charge is applied. Therefore, it logically follows, that the higher that individual’s allowance is, the more scope there is for pension savings to be crystallised before a lifetime allowance tax charge will apply.
Some individuals may already have an LTA higher than the current standard allowance as they have secured one or more of the seven types of LTA protection that have been offered since the LTA was introduced. But even where they haven’t done this already, it is worth remembering that two of these protections are still available if the individual qualifies.
The first of these is Fixed Protection 2016 (or FP16) – this protection provides a minimum LTA of £1.25 million and may be available if the client has not accrued further pension benefits after 5 April 2016. If there is any doubt whether the individual is eligible, then it is always advisable to check the relevant legislation before an application is made.
The second form of protection that could be applied for is Individual Protection 2016 (or IP16) – this is available if the client had pension savings valued at more than £1 million as at 5 April 2016. The value of the LTA will be the higher of the pension savings at that date, or the current standard lifetime allowance, subject to a maximum of £1.25 million. Therefore, Individual Protection 2016 would currently give a personalised LTA of somewhere between the current standard LTA of £1,073,100 and £1.25 million. Again, it is always worth checking the relevant legislation before an application is made.
Regardless of whether the individual has a protected LTA or the standard LTA, the allowance could, potentially be enhanced further, if the individual is eligible to apply for a Lifetime Allowance Enhancement.
Typically, the individual’s lifetime allowance may be enhanced in three scenarios.
The first is the Pension Credit factor – this is where an individual receives a pension credit as a result of a pension sharing order and the benefits they are to receive have previously been crystallised.
The second is the Recognised Overseas Pension Scheme Transfer factor – this is where the individual transfers pension benefits from a recognised overseas pension scheme to a UK-registered pension scheme.
And finally, there is the Non-residence factor – this is where the individual is non-resident for UK tax purposes, whilst being an active member of a UK-registered pension scheme.
The qualification rules, particularly for overseas pension transfers and non-residence, can be quite complex and further details can be found in HMRC’s Pension Tax Manual. However, it is important to note that, where an individual qualifies for an LTA enhancement, HMRC will need to be notified no later than five years after 31 January following the tax year in which they qualified for that enhancement. So, it is advisable to apply for these enhancements as soon as possible if you qualify.
Of course, making sure that an individual has made use of any LTA protections or enhancements is only the beginning of the journey for LTA planning. As mentioned before, LTA planning is far from straightforward, so to assist advisers, we have produced a range of support material. This includes an LTA checklist, to highlight important considerations when assessing an individual’s pension savings, or for a more comprehensive overview we have an LTA Technical Guide. Finally, as we understand that this complex area needs to be communicated with your clients, we have produced a client friendly guide to assist with your discussions. All of these can be found in the Technical Matters pages of our website.
Well, that’s all for now and all that remains for me to say is: thank you for watching and Happy lifetime allowance planning!
This video transcript is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. The value of benefits depends on individual circumstances. Withdrawals from a pension will not normally be possible until age 55. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.