UK Lifetime Allowance protections
HMRC has reduced the lifetime allowance on more than one occasion and each time that HMRC has done this, there have been different forms of protection of the allowance at that time that can be applied for.
April 2006 Protection from the Lifetime Allowance tax charge
When the lifetime allowance was introduced in 2006, it was possible to apply for protection against a potential lifetime allowance charge. If you have successfully applied, you will have received a certificate from HM Revenue & Customs. If you have enhanced and primary protection you will have only one certificate.
Enhanced protection will apply unless it is revoked or lost. It is no longer possible to apply for enhanced or primary protection.
Tax-Free Cash Protection
If on 5 April 2006 you were a member of a pension scheme from which you could take more than 25% taxfree cash, this is automatically protected. It is known as scheme specific protection. This protection will normally be lost if you transfer to another pension scheme. It may be possible for scheme specific protection to be retained if at least two people transfer as part of the same transaction.
If you have primary or enhanced protection and your total tax-free cash entitlement on 5 April 2006 was worth at least £375,000 you could have also applied for protected tax-free cash. Your total taxfree cash entitlement was calculated by adding:
The amount of tax-free cash to which you were entitled on 5 April 2006, but had not taken, and;
A quarter of 25 times any annual pension you were receiving on that date, regardless of the actual taxfree cash taken.
If applicable, the protected tax-free cash will be shown on your primary or enhanced protection certificate.
It will be expressed as a percentage for enhanced protection and a cash amount for primary protection.
The primary protection amount will be increased by 20%, in line with the increase in the lifetime allowance to £1.8 million. Any tax-free cash taken since 5 April 2006 will be revalued as if the current lifetime allowance was £1.8 million.
What are my options if I’m in capped drawdown?
You can make new contributions and transfer other pensions you have into your UK pension which is probably a SIPP.
You can retain your fund as a capped drawdown fund and continue to draw income up to the annual maximum amount.
If you have additional funds within the same SIPP from which you have not yet taken benefits, it will be possible to take these funds into capped drawdown after 6 April 2015 within the same plan and remain in capped drawdown (this is called additional designation).
What are my options if I’m currently in flexible drawdown?
If you were in flexible drawdown prior to 6 April 2015, then your drawdown fund will automatically be converted to flexi-access drawdown by most providers.
You will be able to make further pension contributions of up to £10,000 per annum without incurring an annual allowance charge.
Fixed and Individual Protection
Fixed Protection 2012 & 2014 – On 6 April 2012 the standard lifetime allowance fell from £1.8million to £1.5 million. Individuals holding neither primary nor enhanced protection were able to apply for fixed protection 2012 by 5 April 2012 to fix their lifetime allowance at the higher of £1.8 million or the standard lifetime allowance. On 6 April 2014 the lifetime allowance fell from £1.5 million to £1.25 million. Individuals without protection were able to apply by 5 April 2014 to fix their lifetime allowance at the higher of £1.5 million or the standard lifetime allowance. Fixed protection 2012 and 2014 can be lost in broadly the same way as enhanced protection. This includes making contributions after 5 April 2012 (fixed protection 2012) or after 5 April 2014 (fixed protection 2014). When your pension is measured against the lifetime allowance, you use up a percentage of your personalised lifetime allowance.
Individual Protection 2014 – It is possible to apply for individual protection against the drop in the lifetime allowance to £1.25 million. It allows you to set your allowance at the value of your pensions at 5 April 2014, up to £1.5 million, and continue to make contributions. When your pension is measured against the lifetime allowance, you use up a percentage of your personalised lifetime allowance.
It is possible to have both fixed and individual protection 2014. It is not available if you already have primary protection, including if held with enhanced protection. You can apply on the HMRC website until 5 April 2017. Individual Protection is not lost, even if you transfer your pension.
Fixed Protection 2016 – You can stop contributing to money purchase schemes, and accruing benefits in final salary schemes and have a £1.25m LTA for the rest of your life (unless, of course, the normal LTA goes above £1.25m). Deadline for decision: 5th April 2016 Individual Protection 2016 – you may continue contributing to money purchase schemes, and accruing benefits in final salary schemes but will only have a personal LTA of the value of your fund on 5th April 2016, or if lower £1.25m. Deadline for decision: likely beyond 6th April 2016 due to need to obtain valuations.
Sustainability of income will be a key objective for many as income may need to continue for 25 years or more.