A summary of the Lifetime Allowance calculations which should be used for different forms of protection.
Since pension simplification in April 2006 there have been a string of Lifetime Allowance (LTA) protections which clients could have in different circumstances. The LTA was reduced by legislation in April 2012, in April 2014, and again in April 2016. From April 2018 it is set to be increased each year by the increase in the consumer prices index.
LTA calculations must take these changes into consideration when determining the percentage of the LTA used in different circumstances.
The following notes summarise the calculations which should be used in each benefit crystallisation event (BCE) circumstance. These are not comprehensive calculations and should only be treated as notes and guidelines.
The below calculations are assumed to be taking place after 5 April 2018.
No protection
The standard lifetime allowance applies to individuals who do not have lifetime allowance protection.
After each BCE, the pension scheme will tell the individual the percentage of standard lifetime allowance used up by the BCE.
The individual’s available standard lifetime allowance is the percentage of the lifetime allowance remaining (after all the percentages used up have been added together), applied to the prevailing standard lifetime allowance.
For example, in 2010/11 James decided to draw benefits from a personal pension crystallising £432,000. This used up 24% of the standard lifetime allowance (£432,000/£1,800,000).
In August 2021 James decides to crystallise further pension funds of £700,000. James tells the Scheme Administrator that he has already used up 24% of his lifetime allowance in 2010/11. James’s available lifetime allowance at that point is 76% of the standard lifetime allowance or £1,073,100 x 76% = £815,556. James has sufficient unused lifetime allowance to crystallise the £700,000 without being subject to a lifetime allowance tax charge.
Read our associated article ‘LTA calculations applicable for different types of protection’ which lays out the calculation discussed here in a tabular format.
Enhanced protection
Individuals who felt their pension rights would ultimately exceed the standard lifetime allowance could have applied for Enhanced Protection.
With Enhanced Protection, an individual uses the standard lifetime allowance, each time they crystallise their pension savings.
However, the individual would not be subject to any lifetime allowance excess charges if they used more than 100% of the lifetime allowance, as long as their Enhanced Protection had not been lost.
Read our associated article ‘LTA calculations applicable for different types of protection’ which lays out the calculation discussed here in a tabular format.
Primary protection
Individuals with pension rights of more than £1.5m as at 5 April 2006 could have applied for Primary Protection. The extent to which the member’s rights, valued on 5 April 2006, exceeded £1.5m is expressed as a Primary Protection factor. This protection was originally based on £1.5 million but the lifetime allowance used in these cases reflects the increase in the original LTA to £1.8 million.
An individual with Primary Protection will have their applicable personal lifetime allowance calculated as follows:
£1.8m + (£1.8m x Primary Protection Factor)
For example, a Primary Protection factor of 0.2 gives an individual an applicable personal lifetime allowance of £1.8 million + (£1.8 million x 0.2) = £2,160,000.
Previous crystallisation events
If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up.
The values used up (crystallised) when benefits were previously taken are adjusted to consider changes in the standard lifetime allowance over time. This adjustment is made in one of two ways, depending on when the benefits were previously taken.
Where the event at which the benefits were previously taken (the prior event) occurred between 06/04/2006 and 05/04/2014 (inclusive), the values used up at the prior event are adjusted using the formula:
- Amount crystallised at prior event x (£1.5m / standard lifetime allowance at time of prior event).
Where the prior event occurred on or after 06/04/2014, the values used up are adjusted using the formula. - Amount crystallised at prior event x (current standard lifetime allowance / standard lifetime allowance at time of prior event).
The adjusted values are then deducted from the individual’s applicable personal lifetime allowance. The result is the individual’s available personal lifetime allowance.
For example, Cathy decides to crystallise pension funds in October 2021, when the standard lifetime allowance is £1,073,100. She has had a prior event; she took benefits worth £700,000 in 2008/09 when the standard lifetime allowance was £1.65m.
Cathy has a Primary Protection factor of 0.2. She calculates that her applicable personal lifetime allowance in October 2021 is £2,160,000 (£1.8m + (£1.8m x 0.2)).
Cathy wants to know how much of her personal lifetime allowance she has left.
First, she adjusts the value of lifetime allowance used at the prior event to take changes in the standard lifetime allowance into account. The prior event was between 06/04/2006 and 05/04/2014, and the standard lifetime allowance at the time of that event was £1.65m, so she uses the formula 700,000 x (1.5m /1.65m) = £636,363.63 adjusted amount.
Cathy deducts the adjusted amount from her applicable personal lifetime allowance to arrive at her available personal lifetime allowance. 2,160,000 – 636,363.63 = £1,523,636.37 unused personal lifetime allowance.
If the value of Cathy’s October 2021 event is less than £1,523,636.37 then she would not have any lifetime allowance excess charges to pay.
Read our associated article ‘LTA calculations applicable after 5 April 2014’ LTA calculations applicable for different types of protection’ which lays out the calculation discussed here in a tabular format.
Enhanced LTA factors
An enhanced lifetime allowance can be given as a consequence of receiving a pension credit on divorce, a period of non-UK residence or a transfer to a registered pension scheme from some overseas pension schemes. The enhancement lifetime allowance is given by way of a factor. The LTA enhancement factor determines how much extra should be added to the standard lifetime allowance in any tax year when a benefit crystallisation event occurs. An individual’s lifetime allowance is calculated using the following formula:
SLTA + (LTA x enhancement factor)
Where:
SLTA - is the standard LTA applicable at the point of the BCE
LTA – the value of LTA depends on when the enhancement factor is given. If it was given:
- Before 6 April 2012, LTA is £1.8 million.
- Between 6 April 2012 and 5 April 2014, LTA is £1.5 million.
- Between 6 April 2014 and 5 April 2016, LTA is £1.25 million.
- On/after 6 April 2016 LTA is the standard LTA applicable at the BCE
For example, an enhancement factor of 0.4 given in August 2012, would give an individual a personal lifetime allowance now of £1,073,100 + (£1.5m x 0.4) = £1,673,100.
If an individual has more than one enhanced lifetime allowance factor, the factors would be added together, and the date on which the earliest factor was given would determine the value of LTA.
For example, if an individual had two enhancement factors, 0.3 given in August 2012 and 0.1 in June 2017, the enhancement factor would be 0.4 and the value of LTA would be £1.5m; this would give the individual a personal lifetime allowance now of £1,073,100 + (£1.5m x 0.4) = £1,673,100.
Previous crystallisation events
If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. To work out how much lifetime allowance has been used to date, you can simply multiply the percentages by the current standard lifetime allowance of £1,073,100.
For example, Tim crystallised £600,000 in 2011/12 when the standard lifetime allowance was £1.65m. The Scheme Administrator confirmed to Tim that this used up 33.33% of the standard lifetime allowance (£600,000/£1,650,000).
Tim decides to crystallise further pension funds in December 2021. Tim calculates that he has used up £357,664 (£1,073,100 x 33.33%) of his lifetime allowance at that point.
Tim has an enhanced lifetime allowance factor of 0.3 that was given to him in August 2010. Tim calculates that his personal lifetime allowance in December 2021 is:
£1,073,100 + (£1.8m x 0.3) = £1,613,100
Tim knows that he has £1,255,436 (£1,613,100 - £357,664) unused lifetime allowance at the point he wants to crystallise further pension funds in December 2021.
Read our associated article ‘LTA calculations applicable after 5 April 2020’ which lays out the calculation discussed here in a tabular format.
Fixed protection 2012
This gives an individual a personal lifetime allowance of £1.8 million.
Previous crystallisation events
If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. To work out how much lifetime allowance has been used to date you can simply multiply the percentages by £1.8m.
For example, Jane is looking to crystallise benefits in August 2018 and has had one other previous benefit crystallisation event, which occurred in May 2009. At that point she crystallised £500,000 representing 28.57% of the then standard lifetime allowance of £1.75m. Jane knows that she has 71.43% of her personal lifetime allowance of £1.8m available in August 2018. This equates to £1,285,740.
Read our associated article ‘LTA calculations applicable for different types of protection’ which lays out the calculation discussed here in a tabular format.
Fixed protection 2014
This gives an individual a personal lifetime allowance of £1.5 million.
Previous crystallisation events
If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. To work out how much lifetime allowance has been used to date you can simply multiply the percentages by £1.5m.
For example, Jonny is looking to crystallise benefits in June 2018 and has had one other previous benefit crystallisation event, which occurred in January 2013. At that point he crystallised £425,000 representing 28.33% of the then standard lifetime allowance of £1.5m. Jonny knows that he has 71.67% of his personal lifetime allowance of £1.5m available in June 2018. This equates to £1,075,050.
Read our associated article ‘LTA calculations applicable for different types of protection’ which lays out the calculation discussed here in a tabular format.
Fixed protection 2016
This gives an individual a personal lifetime allowance of £1.25 million.
Previous crystallisation events
If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. To work out how much lifetime allowance has been used to date you can simply multiply the percentages by £1.25m.
For example, David is looking to crystallise benefits in June 2018 and has had one other previous benefit crystallisation event, which occurred in January 2013. At that point he crystallised £425,000 representing 28.33% of the then standard lifetime allowance of £1.5m. David knows that he has 71.67% of his personal lifetime allowance of £1.25m available in June 2018. This equates to £895,875.
Read our associated article ‘LTA calculations applicable for different types of protection’ which lays out the calculation discussed here in a tabular format.
Individual protection 2014
Individual Protection 2014 will give a personalised lifetime allowance based on the value of pension savings on 5 April 2014, up to a cap of £1.5m. For example, if the value of an individual’s pension rights at 5 April 2014 is £1.4m then their personal lifetime allowance will be £1.4m.
Previous crystallisation events
If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. To work out how much lifetime allowance has been used to date you can simply multiply the percentages by the individual protection personalised lifetime allowance.
For example, Paul is looking to crystallise benefits in January 2019 and has had one other previous benefit crystallisation event, which occurred in May 2011. At that point he crystallised £900,000 representing 50% of the then standard lifetime allowance of £1.8m. Paul applied for Individual Protection and the value of his pension rights on the 5 April 2014 was £1,450,000. Paul knows that he has 50% of his personal lifetime allowance of £1,450,000 available in January 2019. This equates to £725,000.
Read our associated article ‘LTA calculations applicable for different types of protection’ which lays out the calculation discussed here in a tabular format.
Individual protection 2016
Individual Protection 2016 will give a personalised lifetime allowance based on the value of pension savings on 5 April 2016, up to a cap of £1.25m. For example, if the value of an individual’s pension rights at 5 April 2016 is £1.2m then their personal lifetime allowance will be £1.2m.
Previous crystallisation events
If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. To work out how much lifetime allowance has been used to date you can simply multiply the percentages by the individual protection personalised lifetime allowance.
For example, Suzie is looking to crystallise benefits in March 2019 and has had one other previous benefit crystallisation event, which occurred in May 2011. At that point she crystallised £800,000 representing 44.44% of the then standard lifetime allowance of £1.8m. Suzie applied for Individual Protection and the value of her pension rights on the 5 April 2016 was £1,200,000. Suzie knows that she has 55.56% of her personal lifetime allowance of £1,200,000 available in March 2019. This equates to £666,720.
Read our associated article ‘LTA calculations applicable for different types of protection’ which lays out the calculation discussed here in a tabular format.
Updated December 2021