How to navigate protection and the lifetime allowance

  • Describe the application conditions for enhanced and primary protection
  • Calculate the lifetime allowance usage under each form of protection
  • Calculate the maximum tax-free lump sum amounts
How to navigate protection and the lifetime allowance

The lifetime allowance (LTA) is a general limit on the amount of benefits you can take from all your pension schemes before you incur tax charges.

It was introduced in 2006/07 as part of the ‘A-day’ pension simplification process, which ushered in new tax rules for all types of pension.

The LTA was originally set at £1,500,000 (this is a key number as we will see later) and there were scheduled annual increases, taking it to a high point of £1,800,000 in 2010/11.

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It was then cut several times, taking it down to £1,000,000 in 2016/17, from which point it started increasing again each year in line with the rise in the consumer prices index.

The LTA currently sits at £1,055,000 (tax tear 2019/20).

For some pension scheme members, the pre-2006 pension rules were more favourable than the new ‘simplified’ rules, and they might have built up pensions benefits which were higher in value than (or close to) the new LTA limit.

LTA protection

In order to soften the blow, the government introduced two forms of LTA protection so people could take the full value of the benefits they had built up before A-day.

These were primary protection and enhanced protection.

Further forms of LTA protection were later introduced in the form of fixed protection and individual protection.

However, there are still thousands of members with enhanced protection and primary protection, and the changes in LTA have made this a complicated area for members and advisers.

We will be focusing on those protections in this article, looking at the application conditions for each and the calculations for tax-free lump sums and for LTA usage.

Primary protection – application conditions

To qualify for primary protection, a member needed to have pensions valued at £1,500,000 or higher as at 5 April 2006.

In order to apply for it, they had to notify HMRC using prescribed application forms on or before 5 April 2009.

The member had to include details of all of their pension scheme benefits on the form.

HMRC then issued a certificate confirming the protection had been granted.

Except in some pension sharing cases, primary protection cannot be lost once it has been granted, and it is not affected by the transfer of funds between pension schemes.

Importantly, members with primary protection can continue to make contributions to pension schemes after 5 April 2006, which is not the case with other forms of protection.

Primary protection – lifetime allowance calculations

For most pension scheme members, their pensions are (or will have been) subject to the LTA figure(s) mentioned in the opening section.

This is often referred to as the standard LTA.

Members with primary protection, however, have a personal LTA that is greater than the standard LTA.

Any LTA tax charge will only apply to benefits that exceed the member’s personal LTA.

The member’s personal LTA is calculated based on an enhancement factor.

This factor was calculated with reference to the member’s fund value on 5 April 2006, so it is specific to them, and it is confirmed on the protection certificate.