What is the Lifetime Allowance?
The Lifetime Allowance (LTA) is the total value of all pension benefits you can have without triggering an excess benefits tax charge. If the value of your pension benefits when you draw them (not including any state retirement pension, pension credit or any partner's or dependant's pension you may be entitled to) is more than the LTA, or more than any protections you may have, you will have to pay tax on the excess benefits.
The LTA covers any pension benefits you may have in all tax-registered pension arrangements - not just the Firefighters’ Pension Schemes.
The LTA was introduced in 2006 and was reduced in 2012, 2014 and again in 2016. Each time the LTA reduced, if you had already planned your pension savings on the basis of the higher LTA, you have been able to protect your pension savings by applying to HMRC for LTA protection. These protections are covered in more detail later
The LTA has been steadily reducing from 2012/13 but has been increased in line with inflation from 2018 onwards.
At the Spring Budget on 3 March 2021, the Government announced that laws will be introduced in 2021 to remove increases in line with inflation for tax years 2021/22 up to and including 2025/26. The amount of the pension lifetime allowance for tax years 2021/22 up to and including 2025/26 will stay at £1,073,100.
|Lifetime Allowance limits since 2011/12|
How is the lifetime allowance calculated?
For pensions that start to be drawn on or after 6 April 2006, the capital value of those pension benefits is calculated by multiplying your annual pension by 20 and adding any lump sum you draw from the pension scheme.
For pensions already in payment before 6 April 2006, the capital value of these is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.
When any FPS benefit, or any other pension arrangement you may have, is put into payment you use up some of your LTA - so even if your pensions are small and individually will not be more than the LTA, you should keep a record of any pensions you receive. If you have a pension in payment before 6 April 2006, this will be treated as having used up part of your allowance.
If your FPS benefits are more than your LTA you will have to pay tax on the excess. If your 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%.
You can choose to pay the tax charge immediately by a reduction to your lump sum or you can ask the scheme to pay the charge for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit.
Changes to the lifetime allowance
The LTA reduced from £1.25 million to £1 million with effect from 6 April 2016.
Two new protections were introduced from this date and are known as Individual Protection 2016 and Fixed Protection 2016. These protections are the same in design as Individual and Fixed Protections 2014 which were introduced when the LTA reduced from £1.5 million to £1.25 million in 2014.
Individual Protection 2016 (IP2016)
You can apply for Individual protection 2016 from 6 April 2016 if you have pension savings valued at over £1 million (including past benefits already in payment) on 5 April 2016. However, if you have primary protection or individual protection 2014 you can’t apply for IP2016.
IP2016 gives a protected LTA equal to the value of your pension rights on 5 April 2016 - up to an overall maximum of £1.25 million. You will not lose IP2016 by making further savings into your pension scheme but any pension savings in excess of your protected LTA will be subject to an LTA charge.
Fixed Protection 2016 (FP2016)
You can apply for Fixed Protection 2016 from 6 April 2016 if you expect your pension savings to be more than the LTA (including past benefits already in payment) when you come to take them on or after 6 April 2016. FP2016 can be used to help reduce or mitigate the LTA charge.
You can't have FP2016 if you already have primary, enhanced, fixed protection 2012 or fixed protection 2014.
With FP2016 your LTA is fixed at £1.25 million rather than the standard LTA. The maximum tax-free lump sum you can take on retirement is the lesser of:
- 25% of the capital value of your FPS benefits, or
- 25% of the LTA which, for those with fixed protection, is £312,500 (i.e. 25% of £1.25 million), or
- 25% of your remaining LTA if you have previously taken payment of (crystallised) pension benefits, as you will have already used up some of your LTA
FP2016 is lost if your benefits increase by more than the cost of living increase. As the cost of living increase for the year 2016/17 was zero, any pension build up, however small, will lead to your pension increasing by more than zero. Therefore, if you applied for and wish to keep FP2016 you would have needed to have opted-out of the FPS with effect from 6 April 2016.
FP2016 will also be lost if you start a new pension arrangement, other than to accept a transfer of existing pension rights, or if you pay contributions into a money purchase pension arrangement, other than to a life assurance policy providing death benefits that started before 6 April 2006. You will also be subject to restrictions on where and how you can transfer benefits.
If you lose FP2016 you must electronically notify HMRC within 90 days of the day on which you could first reasonably be expected to have known that an event had occurred causing you to have lost this protection. Failure to do so could result in a fine of £300 and a penalty of up to £60 per day after the initial fine has been issued until you supply them with the required notification.
Applying for Fixed and Individual Protection 2016
HMRC have introduced an online self-service for pension scheme members to apply for individual protection 2016 (IP2016) or fixed protection 2016 (FP2016). There is no application deadline for IP2016 or FP2016, however, you must apply before you take your retirement benefits as you will need to provide the HMRC reference number to your pension fund administrator if you want to rely on the protection.
You will no longer receive an LTA protection certificate. Instead, once you have successfully applied for protection the online service will provide you with a reference number which you will need to keep.
Your pension savings may already be protected
As mentioned, the LTA was introduced in 2006 and was reduced in 2012, 2014 and again more recently in 2016. Each time the LTA reduced, if you had already planned your pension savings on the basis of the higher LTA you could protect your pension savings by applying to HMRC. If you have applied for a previous protection i.e. enhanced protection, primary protection, fixed protection 2012, individual protection 2014 or fixed protection 2014 you should have received a certificate to confirm your protection.
However, you may still be subject to the LTA charge if you lose this protection.
You can find more information these protections and when they may be lost on the Government’s website - www.gov.uk/tax-on-your-private-pension/lifetime-allowance.
I think I might be affected – what should I do?
Before considering any action to manage your tax liabilities you should always seek independent financial advice from an FCA registered adviser. For help in choosing an independent financial adviser visit the money advice website.
There are certain considerations that you may wish to take into account:
- Converting annual pension for lump sum at retirement can reduce or increase the capital value of your pension benefits
- If you opt out of the FPS with the right to a deferred benefit you may not be able to draw this until later than you had expected
If you have any questions about your FPS membership or benefits, please contact your FRA's pension administrator.