The lifetime allowance was introduced in 2006 as a way to test all pension benefits built up by one individual over their lifetime.
The tests with respect of the allowance take account of the timing of the benefits, type of benefit and the available allowance at the time. It has certainly not been the ever-increasing allowance that it was thought to be when introduced, and even though it hit a peak of £1.8m for a couple of years, the allowance rapidly started descending to where it is now and will soon drop to £1m – £500,000 less than the value at which it was introduced. The impact of these reductions will be hitting individuals who never thought they would be near the LTA and they will need to consider what they want to do with regards to ongoing pension provision and if they need to apply for protection from these reductions.
We have seen many different types of protection from the lifetime allowance. At the outset we had primary and enhanced protection, which was then followed by fixed protection and fixed protection 2014.
Primary protection was only available to those with pension savings at more than £1.5m at 5 April 2006 (A-Day). This was the total of crystallised and uncrystallised funds, and gave the client a multiple of the standard LTA.
So if you had pension savings of £3m then you would have a LTA enhancement factor of 1, meaning you had one extra LTA. In addition, you could protect the pension commencement lump sum, should it be more than £375,000 at A-Day, this was a monetary amount that you could take from any of your schemes until it was used up. It was increased over time in line with the rate of increase in the LTA, but remained at the maximum it could reach when the allowance peaked at £1.8m
Enhanced protection was available to anyone, regardless of the size of his or her pension benefits, at A-Day. It gave an unlimited LTA, meaning they would not be hit by any LTA charge, regardless of the value of their pension rights when crystallised.
However, no relevant benefit accrual can occur after A-Day, as this basically consists of accrual in a defined benefit scheme or further contributions in a money purchase scheme. There can be an increase in the fund or benefits within the scheme and tests are done on crystallisation or transfer from a defined benefit scheme to check that benefits have not increased above the acceptable level. If relevant benefit accrual does occur, enhanced protection will be lost, and if the value at retirement exceeds the LTA then tax charges will apply.
