On 6 April 2006, known as A-day, broad changes were made to pension regulations, aligning the pension system under one set of tax rules, introducing the Annual Allowance, and the LTA.
The LTA sets a limit on the value of pension benefits you can draw in your lifetime without triggering an additional tax charge. Since its introduction, the LTA amount has changed many times, and this has led to the introduction of HMRC protections.
What are these protections, and should you be applying?
What is the LTA?
The LTA is a limit on the value of the pension benefits you can accumulate without becoming liable for an additional tax charge. Your benefits are tested against the LTA each time you access your pension and at age 75.
When it was first introduced the LTA was £1,500,000.
The table shows that the LTA has changed often since inception. In the 2020/21 tax year, the LTA will be £1,075,100.
If you have a total pension fund on or around the current limit, a sudden drop in LTA could mean that you become subject to the LTA charge – and that is where HMRC protections come in.
The LTA excess charge is 55% if you take your pension as a lump sum before age 75. If you leave the excess in the scheme, or wait until age 75, it will be taxed at 25% and future withdrawals will be subject to income tax.
Types of protection
1. Primary protection
If your pension benefits on 5 April 2006 totalled £1,500,000 or more, you could apply for primary protection.
If you were granted primary protection you could continue contributing to your pensions after 6 April 2006 and weren’t subject to the new LTA. Instead, you were given a personal LTA calculated using an LTA enhancement factor.
Once your personal LTA was calculated, exceeding it would result in you paying the LTA charge.
The deadline for applying for this protection was 5 April 2009.
2. Enhanced protection
Enhanced protection was available to anyone, regardless of their fund value, but was intended for those who felt their pension fund might be above the LTA by the time they retired.
If you have this protection in place you won’t ever have to pay the LTA excess charge.
For the protection to be applied, any pension funds you held above the LTA had to be surrendered and no further pension contributions could be made. Further contributions would result in you losing the protection – as would exceeding the relevant benefit accrual limit, and some types of transfer.
The deadline for applying for enhanced protection was 5 April 2009.
3. Fixed protection
In 2012, the LTA dropped from £1,800,000 to £1,500,000.
Fixed protection was introduced, giving you the option to maintain your current allowance (£1,800,000 in this case) in exchange for no longer contributing to any pension schemes.
If you were close to retirement, and therefore unlikely to be contributing for much longer, fixed protection could mitigate the risk of a costly LTA charge.
Further fixed protections have been introduced since. Fixed protection 2014 fixes your LTA at £1,500,000, whilst fixed protection 2016 provides an LTA of £1,250,000.
4. Individual protection
Individual protection (IP) allows you to maintain the LTA at a certain level if you think your funds might exceed the LTA by the time you come to take benefits.
In 2014, the LTA dropped from £1,500,000 to £1,250,000.
If you applied for IP 2014 at this point you would have maintained your individual LTA at the lower of £1,500,000 or the value of your benefits on 5 April 2014.
If you have IP in place, you can continue to contribute to your pension holdings.
The deadline for applying for IP 2014 was 5 April 2017, but as we’ll see, IP 2016 soon followed and that currently has no application deadline.
Do you need fixed or IP protection 2016?
Fixed protection 2016 and IP 2016 were introduced in 2016 when the LTA dropped again, this time from £1,250,000 to £1,000,000.
The deadline for applying for other protections has passed, but you can still apply for both 2016 protections now.
This is how they work:
1. Fixed protection 2016
Fixed protection 2016 locks your LTA at £1,250,000.
Consider applying for it if you think your fund might exceed the value of the current LTA at the point you take your pension. Your potential benefits don’t have to exceed the LTA currently.
Remember that the protection will be lost if you make pension contributions or accrue further benefits. You’ll also need to tell your scheme administrator that the protection exists.
You can’t apply for fixed protection 2016 if you already have fixed 2012, 2014, primary, or enhanced protection. You can hold fixed protection and IP at the same time.
You can apply for fixed protection 2016 via your HMRC online account.
2. Individual protection 2016
If your pension benefits total more than £1,000,000 (the LTA between 6 April 2016 and 5 April 2018), you can protect your funds from the LTA charge up to a maximum of £1,250,000. Any funds above this amount will be subject to the charge.
This means that if you currently have pension rights totalling £1,250,000 you can have this amount as your personal LTA.
If your pension funds are worth £1,300,000 you can use IP 2016 to set your personal LTA at £1,250,000 which will have the effect of reducing your LTA charge when you come to take benefits.
Your personal LTA won’t change unless a future LTA is set higher than your current LTA.
IP has the benefit of allowing you to still contribute to a pension scheme, something you are unable to do with fixed protection 2016.
Individual protection 2016 can be applied for via the HMRC website.
Get in touch
LTA and protection can be complicated. If you’d like to discuss the Lifetime Allowance or a potential application for protection, get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
A pension is a long-term investment not normally accessible until 55. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals and any lifetime allowance charge will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.