Talbot and Muir

Lifetime Allowance

The Lifetime Allowance (LTA) was introduced on 6th April 2006 ("A Day"), and limits the amount that an individual can accumulate in all of their pension schemes. The LTA for 2011/12 is £1.8 million, however the government has announced that on 6th April 2012 it will be reduced to £1.5 million.

The LTA is an aggregate limit which applies to the total amount of pension savings built up over the whole period of an individual's life, including those in payment.

The value of pension savings will be tested against the limit in force at the point any benefits are taken - called a Benefit Crystallisation Event (BCE). If the amount falls within the limit, taking into account any benefits that have already been taken from any pension savings, the benefits can be paid out without a "recovery" tax charge being levied.

When testing the value of pension savings against the LTA, the fund value will be used for defined contributions arrangements, and the value of any defined benefits will be capitalised using a standard valuation factor of 20:1 for benefits in payment.

If the LTA is exceeded when benefits are taken, any excess funds will be subject to a recovery tax charge before benefits can be paid out. If the benefits from the excess funds are to be paid as a pension, the excess will incur a 25% tax charge and the reduced excess fund will be used to provide a pension that will be taxable as income. If the excess is taken as a lump sum, it will be subject to a tax charge of 55%.

Any uncrystallised or unsecured pension funds will also be tested against the LTA once the member reaches the age of 75. Unsecured pension funds are tested to measure the growth in the fund value since they were originally crystallised. Secured pension funds (i.e. where an annuity or scheme pension has been purchased) are not tested against the LTA at age 75.

To protect accumulated pension funds at the point the LTA was introduced, and once the LTA is reduced to £1.5 million in 2012, various types of protection were and are available:

1. Primary Protection - available to those who had pension benefits valued in excess of the LTA of £1.5million at A Day. It attributed qualifying individuals with a Primary Protection factor, measuring the extent to which their pension benefits exceeded the LTA at A Day. When benefits are drawn from their pension the value of their fund will be tested against the Standard Lifetime Allowance, increased by their Primary Protection factor. Individuals crystallising their pension funds from 6th April 2012 will continue to have their Primary Protection factor applied to an LTA of £1.8 million, rather than the reduced LTA of £1.5 million. As long as benefits crystallised are within an individual's personal Lifetime Allowance no tax charges will be incurred.
2. Enhanced Protection - available to anyone, regardless of the size of their pension benefits at A Day. No recovery tax charge will apply, regardless of the value of their pension rights when crystallised. However, no further pension accrual is allowed from 6th April 2006 and no further contributions can be paid. If further pension contributions are made, Enhanced Protection will be lost, and if the fund value at retirement exceeds the LTA, the appropriate recovery charge will be made on the excess when the benefits are vested.

Individuals had to apply for Primary or Enhanced protection before 6th April 2009.

1. Fixed Protection - introduced to protect pension benefits from the reduction in the LTA to £1.5 million on 6th April 2012. Anyone can apply for Fixed Protection, regardless of the value of their pension rights, provided they do not already have Primary or Enhanced protection. Pension benefits up to a value of £1.8 million will be protected from a recovery tax charge, although no further benefit accrual or pension contributions are permitted from 6th April 2012.

Applications for Fixed Protection must be made by 5th April 2012 at the latest.