In the third instalment of our series on pensions we review how they have changed since 2015, and take a look at lifetime allowance and the protection available.
2019/20 Lifetime Allowance
The standard pension lifetime allowance was reduced from £1.25 million to £1 million in 2016/17, and it will increase each year in line with inflation. The current lifetime allowance is £1,055,000.
What can I do to avoid a lifetime allowance charge?
If you have not made any pension contributions (or had ‘relevant accrual’ in a final salary pension scheme) since 5th April 2016, you can still apply for Fixed Protection 2016, which will preserve your lifetime allowance at £1.25 million. However, you will not be able to make any further pension contributions without revoking the protection and reverting to the standard lifetime allowance when taking benefits.
Those that had pension benefits valued in excess of £1 million on 5th April 2016, can still apply for Individual Protection 2016, which will provide a lifetime allowance equal to the value of those benefits on 5th April 2016 or £1.25m if less, with just the additional benefits accrued above this value being subject to a lifetime allowance charge when they are crystallised. Individual Protection 2016 permits ongoing contributions, although of course any additional pension benefits secured will face a lifetime allowance charge of either 25% or 55% when they are eventually taken, or on death before 75 or at age 75, if earlier (the LTA rate applicable at age 75 would be 25%).
While, apart from those described above, there are no further lifetime allowance protection measures currently available to new applicants, it is possible to mitigate and defer lifetime allowance liabilities to a certain extent by crystallising some or all of the benefits sooner rather than later (up to the applicable lifetime allowance) and ensuring that the growth on any drawdown plans is withdrawn as (taxable) income before reaching the age of 75. However, any previously uncrystallised benefits would be subject to a lifetime allowance test at age 75 (or upon death, if earlier), and if there is no lifetime allowance remaining, a tax charge at this point is inevitable.
Taking the excess benefits in the form of an ongoing income (e.g. as a drawdown fund or buying an annuity) rather than as a lump sum would result in a lower level of lifetime allowance charge (25% compared with 55% if taken as a lump sum). While the income will also be taxed when withdrawn (which effectively means that for a higher rate taxpayer, the combined income tax and LTA charge would equate to 55% – the same as if a lump sum was taken), those who are in the 20% basic rate tax band could pay less tax overall by taking excess benefits as income rather than a lump sum.