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Lifetime allowance

Will I exceed my pensions lifetime allowance?

This is the total value of all the pension benefits you can have without you having to pay a tax charge when you draw them. If the value of your pension benefits when you draw them is more than the lifetime allowance you will have to pay tax on the excess benefits.

The lifetime allowance covers any pension benefits you may have in all tax-registered pension arrangements – not just the LGPS. This doesn’t include any state retirement pension, state pension credit or any survivor’s/dependant’s pension you may be entitled to.

The lifetime allowance level from 6 April 2016 is £1 million.

This has decreased from the £1.25 million level set on 6 April 2014. Despite this reduction, most people will not be affected by the lifetime allowance charge as they will not have pension savings of more than £1 million.

How can I work out if I could be affected by the reduced lifetime allowance?

To work out the capital value of pension benefits that start to be drawn on or after 6 April 2006, you multiply your pension by 20 and add any lump sum you draw from the pension scheme. As an example, and to give you a general idea, an LGPS pension of £45,000 per year and a lump sum of £100,000 would have a pension saving value of £1 million.

For pensions already in payment before 6 April 2006, the capital value of these is calculated by multiplying the current annual rate of the pension, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.

When any LGPS benefit, or any other pension arrangement you have, is put into payment you use up some of your lifetime allowance – so even if your pensions are small you should keep a record of any pensions you receive.

What happens if the value of my pension benefits is more than the lifetime allowance?

If your LGPS benefits are more than your lifetime allowance you will have to pay tax on the excess. If excess benefits are paid as a pension the charge will be 25%, with income tax deducted on the ongoing pension payments; if the excess benefits are taken as a lump sum they will be taxed once only at 55%.

Are there any protections from the lifetime allowance tax charge?

Some members may already hold protection certificates relating to the introduction of the lifetime allowance regime at 6 April 2006 or reductions to the lifetime allowance level that occurred on 6 April 2012 and 6 April 2014. More details about these are shown on HMRC’s website (link below).

Because the lifetime allowance has reduced to £1 million from 6 April 2016, HMRC will introduce two new forms of protection:

  • Fixed protection 2016 – this protects the lifetime allowance at £1.25 million but is usually lost unless future pension stop after 5 April 2016.
  • Individual Protection 2016 – you can apply for this if your benefits at 5 April 2016* are valued over £1million. This protects your lifetime allowance to the lower of, the value of your benefits at 5 April 2016 or £1.25million.

Both will be available online from July 2016 (transitional arrangements are in place if you need to apply before this).

* Individual Protection 2014: If your benefits at 5 April 2014 were valued over £1.25 million, you have until 5 April 2017 to apply for this earlier protection certificate. This protects your lifetime allowance to the lower of, the value of your benefits at 5 April 2014 or £1.5million.

For more information about the protections, please visit the HMRC website.

Please note, there may be conditions attached to retaining some of the protection certificates issued by HMRC. You should ensure you are aware of the conditions as you may be required to let HMRC know if you the protection is lost.

Most people will be able to save as much as they wish with full tax relief as their pension savings will be less than the allowances.