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Pension lifetime allowance history and protections

Introduction  

This briefing sets out the history of the lifetime allowance (LTA) and the various lifetime allowance protections that individuals may hold or may be able to apply for if they meet certain criteria. 

The lifetime allowance has been removed from 6 April 2024, however the lifetime allowance protections continue to provide enhanced levels of tax-free lump sums. 

Core considerations 

  • The lifetime allowance was the overall limit on total pension savings an individual could have accumulated without suffering an extra tax charge. 
  • It was last set at £1.0731 million, although for tax year 2023/24 no lifetime allowance charges applied.  
  • The lifetime allowance was introduced on 6 April 2006. When it was introduced, individuals were able to apply to for transitional protections to protect existing benefits against it. These were known as Primary Protection and Enhanced Protection. 
  • The lifetime allowance was initially £1.5m and peaked at £1.8m. Since then, each time it has reduced a form of protection has been offered – either Fixed Protection Individual Protection or both.
  • A lifetime allowance enhancement may also be available in some situations, such as where an individual receives a pension credit following a divorce and where contributions were made while the member was non UK resident    
  • Although the lifetime allowance has been abolished with effect from 6 April 2024, aside from the historical position an understanding may still be relevant.  This is because some individuals may be entitled to higher lump sums on death or on drawing retirement benefits due to the lifetime allowance protection they hold.    

Contents


The lifetime allowance history

The lifetime allowance (LTA) was introduced on 6 April 2006. It imposed a limit on total pension savings an individual can take without triggering an extra tax charge. The standard LTA was originally set at £1.5m, it was increased to £1.8m, then subsequently reduced three times to £1m, and then gradually increased to £1.0731m. 

For tax year 2023/24 no LTA charges apply. The LTA was then  removed from tax year 2024/25 and replaced with the lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA).

When the LTA was first introduced two forms of protection were offered, Enhanced Protection and Primary Protection. When it reduced from £1.8 to £1.5m it was possible to apply for Fixed Protection 2012. With the reductions from £1.5m to £1.25m and the later reduction to £1m, Fixed Protection 2014 and 2016 were offered along with Individual Protection 2014 and 2016. 

Only Fixed Protection 2016 and Individual Protection 2016 are still available for new applications.

The LTA protections remain relevant for the LSA and LSDBA and provide clients access to greater allowances than standard. 
 

Primary Protection

This is one of the transitional protections offered when the LTA was introduced on 6 April 2006. 

This was only available for those whose pension benefits were valued at more than £1.5m on 5 April 2006 and provided a primary protection factor (an addition to the standard allowance). A client’s LSDBA is now equal to £1.8m, plus £1.8m multiplied by their primary protection factor. The LSA is either their protected cash amount multiplied by 1.2, or with no protected cash, £375,000.
 

For example

If the value of an individual’s pension rights at 5 April 2006 were £2.4m, and they had access to tax-free cash of £450,000, the primary protection factor would be 0.6. This is calculated as (£2,400,000 - £1,500,000)/£1,500,000. 
 

The primary protection factor would be applied to an LSDBA of £1,800,000 so the individual’s LSDBA would be £2,880,000 (£1,800,000 x 1.6) assuming no benefits have been taken. The LSA would be £540,000 (£450,000 x 1.2).


Primary protection had to be applied for by 5 April 2009 and HMRC issued a certificate to the individual indicating the Primary Protection factor and, if appropriate, the amount of protected lump sum. 


Enhanced Protection

Enhanced protection was another way of protecting pension benefits on 5 April 2006 irrespective of their value. In order to benefit from this protection the value of an individual’s uncrystallised rights could not have exceeded the value of the maximum permitted pension under pre 6 April 2006 rules. In addition, no further benefit accrual could occur (for example, contributions to any money purchase scheme) between 6 April 2006 and 5 April 2023.  

Enhanced protection had to be applied for by 5 April 2009 and HMRC issued a certificate to the individual confirming Enhanced Protection had been claimed. It also showed the percentage of benefits coming into payment that can be paid as a pension commencement lump sum (tax free cash) if this exceeded £375,000.

Where tax free cash protection applies, the protected amount is limited to the value that could have been paid tax-free on 5 April 2023, minus any tax-free lump sums paid since that date. Where there is no tax-free cash protection the LSA is £375,000.
 
In both cases the LSDBA is equal to the value of uncrystallised benefits on 5 April 2024.

For example

If the value of an individual’s pension rights at 5 April 2006 were £2.5m and they had access to tax-free cash of £500,000, they have protected tax-free cash of 20%. 

The plan value on 5 April 2023 was £5m, with 20% tax-free cash, the LSA is £1m. 

The plan value on 5 April 2024 was £5.4m, so the LSDBA is now £5.4m.


Since 6 April 2023 those with Enhanced Protection could make contributions or receive benefit accrual without losing the protection. Note that additional contributions will not result in additional tax-free cash due to the cap in place from 5 April 2023.

 

Fixed Protection

There have been three rounds of Fixed Protection. These were made available when the LTA was reduced from £1.8m to £1.5m on 6 April 2012, then to £1.25m on 6 April 2014 and then to £1m on 6 April 2016. Fixed Protection now means that a client’s LSDBA is now fixed to the appropriate protected amount of £1.8m, £1.5m or £1.25m respectively. A client’s LSA is equal to 25% of the LSDBA. 

Fixed protection cannot be combined with Enhanced or Primary Protection but can be combined with Individual Protection. It is no longer possible to apply for Fixed Protection 2012 or 2014, but it is still possible to apply for Fixed Protection 2016 which can only be done online – details can be found on GOV.UK.   

It will no longer be possible to apply for Fixed Protection 2016 from 6 April 2025.
 
Eligibility for Fixed Protection is not dependent on a minimum value of benefits when the LTA was reduced. Fixed Protection was generally lost if there is further benefit accrual after the protection took effect. Those who had protection in place on 15 March 2023 can make further contributions or receive benefit accrual from 6 April 2023, without losing Fixed Protection.  

Where new applications for Fixed Protection 2016 are made after 15 March 2023, further contributions or benefit accrual will lead to the loss of protection.
 

Individual Protection

There have been two rounds of Individual Protection. Individual protection is available to those without Primary Protection or a previous form of Individual Protection. It can be combined with Enhanced Protection or any form of Fixed Protection. 

Individual Protection 2014 was available to those with relevant pension values of more than £1.25m on 5 April 2014. It now means a client’s LSDBA matches the value of their rights on 5 April 2014 subject to a maximum of £1.5m. A client’s LSA will be equal to 25% of their LSDBA. 

Individual Protection 2016 is available to those with relevant pension values of more than £1m on 5 April 2016. It now means a client’s LSDBA matches the value of their rights on 5 April 2016 subject to a maximum of £1.25m. A client’s LSA will be equal to 25% of their LSDBA. 

Individual Protection 2014 can no longer be applied for but it is still possible to apply for Individual Protection 2016, which can only be done online  – details can be found on GOV.UK. 

It will no longer be possible to apply for Individual Protection 2016 from 6 April 2025.

Individual Protection can be reduced or lost following an order for pension sharing on divorce.
 

Enhancement factors

Enhancement factors apply to the LSDBA but do not apply to the LSA. These enhancement factors do not therefore increase the amount of tax-free cash a client can access, but will increase the tax free lump sums available on death or on serious ill health. 

It is possible to apply for an enhancement factor in the following circumstances: 

  • where the individual receives a pension credit on divorce on or after 6 April 2006 and before 6 April 2024. No pension credit is available for pensions which came into payment before 6 April 2006, or from pensions that had not been accessed. Details of the credit and, how it is calculated can be found in HMRC’s Pensions Tax Manual PTM175400.
     
  • a relevant overseas individual may be able to qualify for a non-residence enhancement where contributions have been made to a UK scheme without the benefit of UK tax relief. Details can be found in HMRC’s Pensions Tax Manual PTM175300.
     
  • where an individual transfers benefits from a recognised overseas scheme (ROP) to a UK registered scheme after 5 April 2006 and before 6 April 2024, they may be entitled to a recognised overseas transfer factor. No applications will be considered after 5 April 2025. Details can be found in HMRC’s Pensions Tax Manual PTM175201.  

 

 

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