There is an overall ceiling on the amount of tax privileged pension benefits that a person can be provided in their lifetime from all tax approved UK pension schemes (‘Registered pension schemes’) after 5th April 2006. This is called the Lifetime Allowance.
If a person uses up their Lifetime Allowance, there will be significant tax charges on any pension rights they have not yet started taking once they start taking them (or at age 75, if they don’t).
What is the Lifetime Allowance?
The Lifetime Allowance is expressed as a capital value and is set at a particular standard level for each tax year called the ‘Standard Lifetime Allowance’ (‘SLA’).
The following table shows the most recent SLA for the tax years up until 5th April 2011. Thereafter the amount will be reviewed every five tax years.
2008/09 - £1,650,000 2009/10 - £1,750,000 2010/11 - £1,800,000
Most people’s Lifetime Allowance will be whatever the SLA is for the particular tax year in question. Some people may be entitled to a Lifetime Allowance each tax year that is higher than the SLA for that year. This is called an ‘Enhanced Lifetime Allowance’, and will be evidenced by a certificate issued to that person by HM Revenue & Customs (HMRC).
Protection
When these Lifetime Allowance rules were first introduced on 6th April 2006, people with pension rights already within a pension scheme were able in certain circumstances to protect these rights by registering with HMRC.
The main two types of protection are:
- Primary Protection (for those with rights over the £1.5m SLA introduced for 2006/07)
- Enhanced Protection (for anyone, who stopped contributing / accruing rights on 5th April 2006).
They may also need to protect their lump sum entitlements held on 5th April 2006 when applying for Protection.
The deadline to apply for the above Protection is 5th April 2009.
Pensions in payment on 5th April 2006
If a person was in receipt of a pension entitlement already on 6th April 2006 (these are called ‘Pre-commencement pensions’) this has an impact on their available Lifetime Allowance from 6th April 2006 onwards.
Our 'Lifetime Allowance' Fact Sheet explains more on both these issues.