The lifetime allowance affects all pension holders in the UK with pensions worth over £1,073,100. If you fit into this category, you might be eligible for tax-saving protections. Carl Turner looks at the options below.
What is the lifetime allowance?
The lifetime allowance (LTA) is a limit on the amount of pension benefit that can be drawn from UK pension schemes without triggering an extra tax charge.
Following small but steady increases in the LTA every tax year from 2018/19 to 2020/21, in this year’s budget Rishi Sunak announced that the LTA would be frozen at £1,073,100 until 2026.
Pensions in excess of that amount are subject to a one-off charge. This applies to both retirement income in the form of annuities or drawdown plans, taxed at 25%, and lump sums, taxed at 55%. The LTA test is applied each time you access your pension savings and automatically at the age of 75, even if you have not taken any benefits. The UK state pension and QNUPS are excluded.
Does the lifetime allowance apply to me?
I wrote a blog post on the LTA back in May warning UK pension holders not to assume that the LTA won’t affect them. I reiterate that advice here. The way pension value is calculated is not always straightforward. I recommend that all UK expats approaching retirement carry out a pension review to ascertain the value of their pension. It may well be more than you think. This is something that I can help with if you want professional advice, which I do recommend.
If you find that your pension will exceed the LTA you can apply for protection against the recent reduction in the allowance. The government – in a rare show of goodwill! – offers certain protections in recognition of the fact that you were previously saving into your pension expecting a higher allowance.
How to apply for lifetime allowance protection on UK pensions
There are two types of protection you can apply for. Find out which is suited to your circumstances below:
1. Individual protection 2016
Who can apply?
Anyone whose pensions were worth more than $1m on 5th April 2016. Choose this option if you plan to keep contributing into a pension but be aware that you will pay tax on any pension income exceeding your protected lifetime allowance.
What protection is afforded?
The LTA is maintained at the value of your pensions on 5th April 2016 or £1.25m, whichever is lower.
Can you apply if you have other protections?
Yes, this protection is offered in tandem with some, but not all, other protections. You can apply if you have the following protections:
- Fixed protection
- Fixed protection 2014
- Fixed protection 2016
- Enhanced protection
You cannot apply if you have the following protections:
- Individual protection 2014
- Primary protection
2. Fixed protection 2016
Who can apply?
Individuals who do not intend to continue saving into their pension should apply for fixed protection. You can apply if you fit the following criteria:
- Neither you nor your employer have added to your pension since 5th April 2016
- You opted out of any workplace schemes by 5th April 2016
What protection is afforded?
Your lifetime allowance is fixed at £1.25m.
Note that if you have fixed protection and subsequently save into a pension you will lose the protection and pay a tax charge on the excess.
Can you apply if you have other protections?
You can apply if you already have individual protection 2014.
You cannot apply if you already have:
- Fixed protection
- Fixed protection 2014
- Enhanced protection
- Primary protection
Applications should be made directly to HMRC via the government website.
Feel free to contact me for help and guidance with regard to LTA protections and any other questions you have on the best way to save and invest for your retirement as a British expatriate living abroad.
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