Is Your Lifetime Allowance Protected?

Tax Planning

The lifetime allowance is the maximum size the government allows a pension fund to reach without penalising retirement savers with tax charges.

The lifetime allowance is often referred to as the ‘LTA’ and is set by the Chancellor in the annual Budget.

The figure can vary from year to year, and is currently on a downward trend.

This tax year, the level dropped from £1.5 million to £1.25 million, and the LTA is set to drop again in April 2016 to £1 million.

While this heady limit will not concern most retirement savers, many wealthy pension investors could face hefty tax charges if they breach the limit.

To safeguard savers from paying tax charges each time the government moves the goal posts, a number of protections have been introduced over the years.

What are the different lifetime allowance protections?

Recognising this as an issue, the government has allowed these wealthy pension savers to protect their LTA.

  • Primary Protection

Primary Protection was introduced in April 2006 when the LTA was set at £1.5 million and aimed at savers who had already breached the limit or were likely to do so before they drew benefits from their pension.

  • Enhanced Protection

Enhanced Protection was also available from April 2006 for pension savers concerned their fund would exceed the LTA when they retired and allowed them to sidestep the 55% tax charge on breaching the LTA limit

  • Fixed Protection

In 2012, the LTA dropped from £1.8 million to £1.5 million and another round of protection – fixed protection – came in to safeguard wealthy pension savers from paying tax on funds of over £1.5 million.

Fixed Protection was also extended in 2014 to further safeguard a pension saver with fixed protection from 2012 from a further decrease in the LTA to £1.25 million.

  • Individual Protection

Around 120,000 retirement savers are expected to have pension funds of more than the LTA of £1.25 million in April 2014.

Individual Protection is a fall-back position for savers who did not take out Primary Protection in earlier years.

HM Revenue & Customs (HMRC) has also indicated that two more protection rounds are on the way – Fixed Protection 2016 and Individual Protection 2016.




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