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Contributing to a private pension explained

Pensions lifetime allowance explained - and how to protect it

By Paul Davies

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Pensions lifetime allowance explained - and how to protect it

You can save as much as you want to in your pension – but if it exceeds a total amount, you could be hit with a hefty tax charge.

You can save as much as you want to in your pension – but if it exceeds a total amount, you could be hit with a hefty tax charge.

This total is called the lifetime allowance.

This guide explains everything you need to know about the lifetime allowance – and the system you can use to protect your pension from a large tax bill.

What is the pension lifetime allowance in 2017/18?

The lifetime allowance, which currently stands at £1 million, is the total value of pension benefits you can receive in your lifetime without having to pay a tax charge.

In 2017/18 the lifetime allowance has been held at £1m after previously falling from £1.5m and £1.25m.

The chart below shows how the lifetime allowance has reduced over the years.

From 2018/19, the lifetime allowance will be increased by inflation (as measured by the Consumer Prices Index rate the previous September). That means you’ll be able to calculate what next year’s lifetime allowance will be using the September 2017 rate of inflation.

What is the pension lifetime allowance charge?

Any amount you have in your pension above the lifetime allowance is subject to a tax charge.

It is a one-off charge of:

  • 25% if paid as pension (meaning that you buy an annuity or take a regular income through a drawdown plan)
  • or 55% if paid as a lump sum.

The charge can be applied in either of the two ways or a combination of both depending on how you take the excess benefits above the lifetime allowance.

Protecting your pension lifetime allowance

In order to avoid a hefty tax charge on your savings, you’ll need to monitor your pensions closely to ensure you don’t exceed the lifetime allowance.

But there's another tactic you can use – you apply for ‘protection’ from the recent reductions in the lifetime allowance, which is available to you in recognition that you were previously saving into your pension with a higher allowance in mind.  

There are two types of protection you can apply for which have replaced previous versions:

Individual protection 2016

You can apply for individual protection 2016 if your pension or pensions were worth more than £1m at 5 April 2016.

This protects your lifetime allowance at the value of your pensions on 5 April 2016 or £1.25m, whichever is the lowest.

You can keep on building up your pension, but must pay tax on money taken from your pensions that exceed your protected lifetime allowance.

You can still apply if you already have previous protection, ie:

  • enhanced protection
  • fixed protection
  • fixed protection 2014
  • fixed protection 2016

You can’t apply if you have either:

  • primary protection
  • individual protection 2014

Fixed protection 2016

Fixed protection 2016 fixes your lifetime allowance at £1.25m, but you can no longer contribute to your pension. This tends to be the right option for people who no longer want or need to save into a pension any more.

If you do put money into a pension once you have fixed protection, you’ll lose it and will have to pay a tax charge on the excess

  • You can apply for fixed protection 2016 if you:
  • or your employer haven’t added to your pension since 5 April 2016
  • opted out of any workplace schemes by 5 April 2016
  • already have individual protection 2014

You can’t apply if you have:

  • enhanced protection
  • primary protection
  • fixed protection
  • fixed protection 2014

How do I apply for lifetime allowance protection?

You can apply for either individual protection or fixed protection through the government’s website.

  • Updated by: Paul Davies
  • Last updated: July 2017
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