Backdating Lifetime Allowance Fixed Protection

Published / Last Updated on 11/05/2021

The Lifetime Allowance (LTA) is the maximum that you can build up in pension funds throughout your lifetime.  This was originally set in 2006 at £1.8m.  It was reduced over the years down to £1m, then subsequently increased by inflation to £1,073,100.  The LTA was then frozen at this level until April 2026.  In its very basic format, it is calculated as follows:

  • Money Purchase/Investment Linked Pension Funds:  The total value of the pension fund.
  • Defined Benefit Pension Schemes: A multiple of 20 X the value of the annual pension you have built up.

It is more complex than this but we hope the above gives you the basic idea.

What if your pension fund values were worth more than the LTA?

You were allowed to protect your allowance before the LTA was reduced.

For example, in 2016, the Lifetime Allowance was reduced from £1.25m to £1m.  This means that for people with pension valuations in excess of £1.25m and for this with funds likely to grow above £1.25m by retirement age would face extra tax penalties without protection.  A process of applying to HMRC for Fixed Protection of your LTA was introduced each time the LTA was reduced i.e.  in 2012, then 2014 and 2016.

Type

Protected
Lifetime Allowance

Contributions Must Stop Before

Deadline To Apply

Fixed Protection 2012

£1.8 million

6 April 2012 

5 April 2012

Fixed Protection 2014

£1.5 million

6 April 2014 

5 April 2014

Fixed Protection 2016

£1.25 million

6 April 2016 

No end date

Many people did not apply to HMRC for Fixed Protection and now the only level currently open is 2016.  If you have built up additional pensions rights by you or your employer paying into pensions for you since April 2016 then you lose the right to apply for fixed protection.

That said, there are many people that have stopped accruing pension rights since April 2016 but did not apply for Fixed Protection 2016.  This means that if you have since taken some of your pension rights you will have been issued with a Lifetime Allowance Certificate confirming you have used X% of the wrong LTA.

Backdated Fixed Protection 2016

E.g.  Dave has pension funds now worth £1.1m.   He and is employer have not made any further pension contributions or accruals since 2016.  He took the benefits from 1 pension fund worth £100,000 in January 2017.  He will have been issued with an LTA Certificate to confirm that he has used 10% of his LTA i.e.  £100,000 of £1m = 10%.  This means he has 90% of his LTA left.

As at April 2021, the current LTA is £1,073,100 i.e.  he has 90% left i.e.  £1,035,000.  If he now takes his remaining £1.1m, he will exceed to current lifetime allowance and face a tax charge.

But, he was and still is eligible to apply for backdated Fixed Protection 2016 (as he has not accrued any further pension rights).  He needs to apply to HMRC for Fixed Protection 2016.  This is done via your Government Gateway.

By applying retrospectively for Fixed Protection 2016, his LTA use now looks like this:

Fixed Protection LTA £1.25m.   £100,000 pension fund taken so far = £100,000/£1.25m X 100 = 8%.

This means he still has 92% of his LTA left £1.25M + inflation, but for this example, we will leave it at £1.25m x 92% = £1,150m.  Dave’s unused LTA is above his £1.1m remaining pension fund values and thus no tax penalties.

Losing Fixed Protection

  • If you accrue further pension rights from 2016, you will automatically lose your Fixed Protection.
  • If you transfer your money purchase/investment linked pension to another investment linked pension, you will not lose your Fixed Protection.
  • If you transfer your defined benefit pension to an investment linked pension, you will not lose your Fixed Protection.

Lifetime allowance and protecting yourself from tax charges can be complex.  Need help with pensions?

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