Lifetime allowance and the lifetime allowance charge

Produced by Tolley in association with John Hayward
  • (Updated for Budget 2021)
Lifetime allowance and the lifetime allowance charge

The following Employment Tax guidance note Produced by Tolley in association with John Hayward provides comprehensive and up to date tax information covering:

  • Lifetime allowance and the lifetime allowance charge
  • Introduction
  • The lifetime allowance from 6 April 2011
  • Fixed protection
  • The lifetime allowance from 6 April 2014
  • Fixed protection 2014 (FP14) and individual protection 2014 (IP14)
  • The lifetime allowance from 6 April 2016 and online services
  • Lifetime allowance look-up service
  • Interaction with automatic enrolment
  • Retirement age and its impact on the lifetime allowance
  • More...

Introduction

A lifetime limit on the total amount of pension value that could benefit from tax relief was introduced with effect from 6 April 2006.

The amount of the lifetime allowance has changed frequently:

Tax YearAmount
2020/21–2025/26£1,073,100
2019/20£1,055,000
2018/19£1,030,000
2016/17–2017/18£1,000,000
2014/15–2015/16£1,250,000
2013/14£1,500,000
2012/13£1,500,000
2010/11–2011/12£1,800,000
2009/10£1,750,000
2008/09£1,650,000
2007/08£1,600,000
2006/07£1,500,000

From 6 April 2018, the lifetime allowance has increased annually in line with increases in the Consumer Price Index (CPI). This link between the CPI and the lifetime allowance has been removed with effect from 6 April 2021. The lifetime allowance is frozen at £1,073,100 for the tax years 2021/22 to 2025/26.

Testing against the lifetime allowance takes place at a benefit crystallisation event (BCE). Generally, a benefit crystallisation event will occur when benefits are taken.

At the time of the introduction of the limit, it was recognised that there were some people with pension rights already exceeding the lifetime allowance and that without protecting them in some way, they would become subject to a lifetime allowance charge (see below) when benefits are taken.

Two forms of protection were introduced. Primary protection was designed for those who, as at 5 April 2006, already had pension rights that exceeded £1.5m. So long as those individuals registered for primary protection before 6 April 2009, they received the benefit of an enhanced lifetime allowance calculated by reference to the value of the individual’s pension rights as of 5 April 2006.

The second form of protection, enhanced protection, was available to anybody whether or not the value of their pension rights at 5 April 2006 already exceeded the then lifetime allowance. By undertaking not to accrue additional pension rights (other than a limited exemption associated with defined benefit scheme membership), the individual with enhanced protection benefits from an unlimited lifetime allowance.

Registration was necessary in order to benefit from one of or both forms of protection.

The lifetime allowance from 6 April 2011

Finance Act 2011 reduced the lifetime allowance to £1.5m from 6 April 2012.

The legislation that puts this in place is set

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