The Lifetime Allowance (LTA) was introduce in April 2006 when pension rules were overhauled. The LTA is the total value of pension benefits an individual may build. The original LTA limit was £1.5m and rose to £1.8m, however from 2012 it has been reduced and this year (2016/2017) is £1m.
Generally, anyone taking (“crystallising”) their pension will have the benefits tested against the LTA. Values in excess will be taxed at 55% on capital or 25% on income.
In April 2006 and subsequently each time the LTA was reduced, various protections were available allowing individuals to lock in to higher LTAs. Those with protection will need to take extra care in planning, especially where they have Enhanced Protection or Fixed Protection as they may no longer make pension contributions.
The value of an individual’s Lifetime Allowance may also be adjusted where pensions are shared on divorce. If the shares is in their favour and they receive a pension credit their LTA will be adjusted if:
i. The credit was before 6th April 2006 OR
ii. If the pension being shared came into payment after 5th April 2006 and was in payment at the date of the sharing order.
In these instances an individual must apply for an increase to their standard LTA, it will not be awarded automatically.
The position is more complex where the individual receiving the credit has LTA protection (Primary, Enhanced, Fixed or Individual).
If the sharing order is against an individual’s pension and a debit is made and they have Primary Protection or Individual Protection then that protection is recalculated.
Anyone with Enhanced Protection or Fixed Protection will not be affected in this way by a debit but due to the terms of protection they will have limited ability to rebuild their pensions.
The deadline for apply for Individual Protection 2014 is 5th April 2017.
A brief word on the Annual Allowance (AA). This is the amount that may be paid into a pension each year. This has also been reduced recently to a standard £40,000. From this year those with high earnings or who are taking pensions using flexi-access, will have an AA as low as £10,000 and £4,000 next year. Again this will limit the ability to rebuild pensions if they are shared on divorce.
This article has not attempted to cover all the aspects of the LTA and AA but highlights some key issues. As with many aspects of pensions a little knowledge can be a dangerous thing. Specialist financial advice should be sought when LTA and AA planning is required.