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Pensions: protecting your lifetime allowance

Did you know that it is still possible to apply to protect your pension(s) against previous reductions in the lifetime allowance? The lifetime allowance is set at £1 million in 2017/18, however Fixed Protection and Individual Protection may mean it is possible to save up to £1.25 million without incurring a tax charge.

What is the lifetime allowance?

The lifetime limit sets the maximum figure for tax-relieved savings in a pension fund. The lifetime allowance fell to £1.25 million on 6 April 2014, and then again to £1 million on 6 April 2016. From April 2018 onwards the lifetime allowance will increase annually in line with the Consumer Prices Index (CPI), rising to £1,030,000 for the tax year 2018/19.

Where the value of the scheme(s) exceeds the lifetime limit when benefits are drawn, there is a tax charge of 55% of the excess if taken as a lump sum, and 25% if taken as a pension.

Protecting your allowance

However, the good news is that it may be possible to apply for protection where an individual has significant pension contributions. There are two types of protection available. The first is known as ‘Individual Protection 2016’. This enables savers to fix their lifetime allowance at the value of the fund at 6 April 2016, provided the fund has reached at least £1 million in value at that date. However, the value to be protected cannot exceed £1.25 million.

Further contributions are allowed under this protection, but withdrawals exceeding your protected lifetime allowance will be subject to tax. You cannot apply for Individual Protection 2016 if you have either Primary Protection or Individual Protection 2014. In most cases you can check whether you already have protection by signing in to your online account.

The other type of protection is known as ‘Fixed Protection 2016’ and will be of benefit if total pension savings are expected to exceed £1 million when the savings are accessed in the future. Fixed Protection retains the £1.25 million lifetime allowance. A critical condition for this protection is that no further contributions can occur from 6 April 2016 (except in limited circumstances). You cannot apply for Fixed Protection 2016 if you already have Enhanced Protection, Primary Protection, Fixed Protection or Fixed Protection 2014.

How do I apply?

Applications for Individual and Fixed Protection can be made online, although you will need to set up an account to use HMRC online services. There is currently no deadline for making applications.

After applying for lifetime allowance protection, you will receive a protection notification number and a scheme administrator reference. Your scheme administrator will require these numbers when you decide to take money from your pension scheme.

The pensions rules are notoriously complicated and individuals should seek professional advice to ensure that their savings are as tax-efficient as possible.