Answers to your pension queries about the Lifetime Allowance, what it is, how much it is, ways to reduce your potential tax charge and other issues.
What is the standard Lifetime Allowance?
The standard LTA is the maximum amount of pension saving you can have without incurring a tax charge. The LTA applies to your entire pension saving excluding the State pension. The tax charge represents a clawing back of some of the tax relief which you have received during the build up of your pension benefits.
When was the LTA introduced?
The LTA was introduced on 6 April 2006. This is known as 'A Day'.
How much is the standard LTA?
At its introduction the standard LTA was set at £1.5 million. The table indicates the value of the standard LTA from that date up to 2016/17. From 2018/19 onwards it is intended that the standard LTA increases in line with inflation (linked to the Consumer Prices Index).
|The Lifetime Allowance - 2006/07 to 2016/17
How is my NHS pension tested against the standard LTA?
Your NHS pension is multiplied by a factor of 20 and added to any lump sum. The resultant figure is known as the capital value of your benefits.
The LTA is tested against the pension and lump sum amounts that you are going to receive:
- after any commutation of pension to provide optional lump sum,
- after allocation,
- after the application of actuarial reduction,
- after the application of a pension debit (on divorce),
- after any deduction made for utilising the scheme pays facility (see FAQ on Annual Allowance)
You will also need to include any other pension benefits from other occupational or personal pension arrangements.
The state pension is not included.
What is the maximum lump sum available?
Since 6 April 2006 the maximum lump sum that can be paid tax-free, is restricted to the lower of:
- 25% of the capital value of the benefits to be paid; or
- 25% of the available standard LTA.
If your benefits crystallise on or after 6 April 2016 the maximum tax-free lump sum available is £250,000 unless you hold a protected lump sum certificate, have Primary Protection, Enhanced Protection or Fixed Protection. Should the LTA increase with CPI increases from 2018/19 onwards the maximum lump sum will be 25% of the increased LTA.
If you have Individual Protection you may be able to claim a lump sum of 25% of your individually protected LTA.
'Benefit crystallisation' is the term used by HM Revenue and Customs (HMRC) to define an event which requires that your benefits are tested against the LTA. Most frequently this will be on drawing pension benefits. When you retire from the NHS pension scheme you will have two benefit crystallisation events, one in respect of your lump sum and one in respect of your pension.
What is a protected lump sum certificate?
If, on 6 April 2006 you had lump sum benefits totalling more than £375,000, from all your pension providers, you could have applied to protect your lump sum. If you applied for this protection HMRC would advise you of this on your certificate of Primary or Enhanced protection.
Further information on protection of benefits is included below in the sections on Primary, Enhanced, Fixed protection 2012, 2014, and 2016 and Individual protection 2014 and 2016.
I am buying added years or additional pension. Will these benefits be included in the calculation of my capital value?
Yes. The LTA is tested against the pension and lump sum amounts you are going to receive including any added years or additional pension that you have purchased.
What happens if my NHS pension is more than the LTA?
If your pension benefits exceed the LTA then a tax charge, known as the Lifetime Allowance Charge, will apply.
The charge is applied on the excess benefits only.
The LTA charge is 25% if the excess is taken as scheme pension and 55% if the excess is taken as a lump sum. You will only pay a tax charge on the amount by which you exceed the
LTA, not on your entire pension or lump sum.
How do I pay my LTA charge?
If you have an LTA charge as a result of your NHS pension scheme benefits exceeding the LTA, the pensions agencies will usually apply the charge against your annual pension. When applied against the pension the LTA charge is 25% on the excess. The LTA charge is divided by an age related actuarial factor, and your NHS pension is reduced by this amount. You are not required to meet the charge before the payment of your benefits. The charge is deducted from your pension and this reduced pension is payable for life.
An example of how the charge is calculated is detailed below with the assumption that you are subject to the standard LTA of £1.03 million:
||£1.15m ((20 x £50,000) + £150,000)
||£120,000 (£1.03m - £1.15m)
|The tax charge payable
||£30,000 (£120,000, X 25%)
|Reduction to pension
|Reduced pension payable
||£48,500 (£50,000 - £1,500)
*assumed actuarial factor of 20
What are the actuarial factors?
If you are contributing to the NHS pension scheme in England and Wales or the HSC Pension Scheme in Northern Ireland:.
View the actuarial factors
If you are contributing to the NHS Superannuation Scheme (Scotland) the factors are slightly different. Please contact the BMA Pensions Department for details.
If I take a bigger lump sum will it affect the capital value of my benefits?
Yes. If you commute pension to lump sum each £1 of pension you give up will provide £12 of lump sum. Commuting pension to lump sum will reduce the capital value of benefits and can help reduce exposure to a LTA charge.
Even if you are unable to reduce the capital value of your benefits to within the LTA threshold you can still reduce the value of any potential LTA charge in this way.
Further information on commuting pension to lump sum is available in our tax free lump sum FAQs.
How is the LTA charge calculated if I claim the maximum lump sum?
Using the figures from the example above if, instead of taking the standard benefits, you claim the maximum lump sum you would receive an enhanced lump sum of £267,852 and a reduced pension of £40,179.
The capital value of these benefits is £1,071,432 ((20 X £40,179) + £267,852).
You have an excess fund of £41,432 (£1,071,432 - £1,030,000).
You would incur an LTA charge of 55% on the excess lump sum of £5,694 (£10,352 (£267,852 - £257,500) X 55%) and a further charge at 25% on the excess pension of £31,080 (£41,432 - £10,352).
The tax charge payable is £7,770 (£31,080 X 25%) and this will be recovered by reducing your annual pension by £389 (£7,770/20).
You would receive a lump sum of £262,158 (£257,500 + £4,658 (£10,352 - £5,694)) and a reduced pension of £39,790 having met all LTA tax charges.
How is the LTA charge calculated if I claim the maximum tax free lump sum?
If you claim the maximum tax free lump sum you would receive an enhanced lump sum of £257,496 and a reduced pension of £41,042.
The capital value of these benefits is £1,078,336 ((£41,042 X 20 + £257,496)).
You would incur no LTA charge on the lump sum and an LTA charge of 25% on the excess pension of £48,336 ((£41,042 x 20) + £257,496) = £1,078,336 - £1,030,000).
The tax charge payable is £12,084 (£48,336 X 25%) and this will be recovered by reducing your annual pension by £604 (£12,084/20).
You would receive a lump sum of £257,496 and a reduced pension of £40,438 (£41,042 - £604 having paid your tax charge.
Are there other ways in which I can reduce any potential tax charge?
Yes. In addition to, or as an alternative to taking a bigger lump sum you could allocate part of your pension to a named dependant. This reduces the amount of pension you receive at retirement and therefore the pension which is used to calculate the capital value of your benefits. Please refer to our FAQ on 'allocation' for further information.
If you retire early with actuarially reduced benefits, the capital value is calculated with reference to your reduced benefits. This can have the effect of reducing your LTA charge.
If you divorce and are subject to a pension sharing order, the capital value is calculated with reference to your benefits after the debit has been deducted at retirement.
If you elect to pay an annual allowance tax charge via the scheme pays facility, the capital value is calculated with reference to your benefits after the appropriate deduction has been made.
If your benefits are over the LTA you may wish to opt out of NHS pension scheme membership to restrict further benefits accruing.
Any action you consider taking which has the effect of restricting your pension saving should be considered very carefully and in discussion with an independent financial adviser. Due consideration should be given to the overall restriction in pension benefits, loss of life assurance and preferential ill health retirement arrangement as a result of opting out. If you are made redundant during a period where you have opted out of scheme membership your options will be limited.
Does the capital value include my contributions to other pension arrangements?
Yes. Your total pension saving is subject to the LTA.
Each time you draw pension benefits, known as benefit crystallisation, you will use up part of your LTA. At your first retirement you will have 100% of the LTA available. At any subsequent retirement you will have the remaining unused portion of the LTA available to you.
If you have multiple pension arrangements you may wish to discuss your options with an independent financial adviser. Factors such as which order to draw benefits, whether to take lump sum benefits from personal arrangements or from the NHS etc may influence the amount of benefits you can claim within the LTA.
I had a pension already in payment at 6 April 2006. How is this tested against the LTA?
These benefits will not be relevant unless you draw further pension benefits from a registered pension scheme after 6 April 2006.
If you draw additional benefits after 6 April 2006 you will need to multiply the pension already in payment, at its current value as at the date of claiming the additional pension, by a factor of 25.
For example, assuming a further retirement in 2008/9:
Current value of pension in payment - £15,000
Capital Value - £375,000 (£15,000 X 25)
Standard LTA used - 22.73% ((£375,000/£165m) X 100)
Available Standard LTA - 77.27% of £1.65m
What happens if my pension saving was already over the standard LTA at 6 April 2006?
Between 6 April 2006 and 5 April 2009 you were able to apply for transitional protection so that the benefits you had accrued up to 5 April 2006 would not be penalised by the change in pension tax legislation. These were known as Primary and Enhanced Protection.
What transitional protection was available to me?
On 6 April 2006, there were two types of protection available, Primary Protection and Enhanced Protection. To apply for these you needed to register your application with HMRC before 6 April 2009.
Primary Protection was available if you had pension savings in excess of the then standard LTA, of £1.5 million, on 5 April 2006.
Enhanced Protection was available to anyone regardless of the value of their accrued benefits at 5 April 2006.
What is primary protection?
Primary Protection recognised that you had pension savings of more than the standard LTA.
An application for primary protection granted you a personal LTA in excess of the standard LTA which reflected how much your capital value at 6 April 2006 exceeded £1.5 million.
Your personal LTA is expressed as a factor calculated as follows:
|Value of pension savings at 5 April 2006
|Value of LTA at 5 April 2006
| £1.6m - £1.5 = £100,000 / £1.5m = 0.066
Primary protection factor is 0.07 (rounded to two decimal places)
The factor reflects the percentage by which your benefits at 6 April 2006 exceed the standard LTA.
What happened to my primary protection in April 2012 when the LTA was reduced?
HMRC has advised that following the reduction in the standard LTA on 6 April 2012, 6 April 2014 and 6 April 2016, individuals with Primary Protection will continue to measure their personal LTA with reference to the previous standard LTA of £1.8 million.
Your personal LTA is calculated as follows:
Personal LTA = £1.8 million + (£1.8m X primary protection factor)
With reference to the example above, if you have a protection factor of 0.07, your personal LTA in 2012/13 is £1.926m.
This is irrespective of the fact that the standard LTA has reduced to £1m.
I have Primary Protection. Are there any restrictions on my tax-free lump sum?
Even with Primary Protection the maximum permitted tax-free lump sum payable is the lower of:
- 25% of £1.5 million, or
- 25% of the capital value of the benefits to be paid.
If you have benefits in payment from another pension arrangement; you could incur a LTA charge on your lump sum payment as well as your pension benefits.
This could occur if your compulsory lump sum from the NHS pension scheme takes your total lump sum benefits to more than 25% of your available standard LTA.
I have lump sum protection. How is this affected by Primary Protection?
Normally the total of all your tax free lump sums cannot be more than 25% of the standard LTA.
However if you had the right to take a tax free lump sum of more than £375,000 (25 % of the £1.5m standard LTA) from your pension savings on 5 April 2006, you could apply to protect this level of lump as well as holding primary protection. Your primary protection certificate details the amount of your protected lump sum.
What is Enhanced Protection?
Enhanced protection allows for all of your pension benefits to be protected from the LTA charge irrespective of the size of the pension saving at retirement providing the benefits have not increased by more than a set rate between 6 April 2006 and your retirement date.
The rate of growth of your benefits is subject to a test known as the Relevant Benefit Accrual (RBA) test.
Where the RBA test is passed you will retain enhanced protection and can claim all of your benefits without the application of a LTA charge. Where the RBA test is failed then you will lose your enhanced protection and your pension saving will be tested against the standard LTA (unless you have dormant Primary Protection or Individual Protection).
What is the RBA test?
The RBA test measures the growth in your pension benefits between 6 April 2006 and your retirement date.
The test is applied in all cases where a member of the NHS pension scheme has a certificate of Enhanced Protection.
The RBA test is as follows:
Test 1: The indexed amount - growth in the capital value (at 5 April 2006) increased by the greater of 5% per year or the Retail Prices Index.
Test 2: The earnings recalculation amount - capital value of benefits calculated using your accrued membership on 5 April 2006 and pensionable pay at retirement.
For GPs test 2 involves working out the GP flexibilities conversion at 5 April 2006 and applying this to your accrued benefits at retirement. Please refer to our FAQ on GP flexibilities for further information.
Enhanced Protection is lost where the capital value of your crystallising pension benefits exceeds both of the above tests. As long as you pass either test 1 or test 2 you will retain your Enhanced Protection.
Are there any other restrictions on Enhanced Protection?
Enhanced protection may be lost if, after 5 April 2006 you have:
- paid a contribution to a money purchase pension arrangement (personal pension plan, AVCs etc)
- built up further benefits in the NHS pension scheme that exceed the RBA
- built up new benefits in a defined benefit scheme (other than the NHS pension scheme) or in a cash balance pension scheme, above the RBA
- joined a new pension scheme - unless you are only transferring pension savings from one of your existing schemes into the new scheme
- start saving in a new pension arrangement. The 2015 NHS pension scheme is a new pension arrangement for this purpose.
Does Enhanced Protection protect my pension and lump sum?
Enhanced Protection does not increase the available tax free lump sum but from 6 April 2014 you are permitted to access the lower of:
- 25% of £1.5 million, or
- 25% of the capital value of the benefits paid.
I have lump sum protection, how is this affected by Enhanced Protection?
Normally the total of all your tax free lump sums cannot be more than 25% of the standard LTA.
However if you had the right to take a tax free lump sum of more than £375,000 (25 % of the £1.5m standard LTA) from your pension savings on 5 April 2006, you could apply to protect this level of lump as well as holding Enhanced Protection. Your Primary Protection certificate details the amount of your protected lump sum.
Can I have Enhanced Protection and Primary Protection?
Yes. This will only apply if your pension saving was greater than the standard LTA on 6 April 2006.
If this is the case, you will usually hold Enhanced Protection and dormant Primary Protection. If you fail the RBA test and lose your Enhanced Protection then you can apply to HMRC for your Enhanced Protection to be disregarded and you can activate your Primary Protection.
When the LTA was reduced in April 2012 was any further protection available to me?
Yes. You could have applied for Fixed Protection 2012, before the deadline of 5 April 2012.
When the LTA was reduced in April 2014 was any further protection available to me?
Yes. You could have applied for Fixed Protection 2014 before the deadline of 5 April 2014, or Individual Protection by 5 April 2017.
When the LTA was reduced in April 2016 was any further protection available to me?
Yes. You can apply for Fixed Protection 2016 or Individual Protection 2016. There is no deadline for registering for this type of protection however your application must be registered prior to your retirement date.
What is Fixed Protection?
Fixed Protection recognised that you may expect to have pension savings of more than the standard LTA of £1.5m after 5 April 2012, £1.25m after 5 April 2014 or £1m after 5 April 2016.
An application for Fixed Protection 2012 granted you a personal LTA of £1.8m. An application for Fixed Protection 2014 granted you a personal LTA of £1.5m. An application for Fixed Protection 2016 granted you a personal LTA of £1.25m.
Who could apply for Fixed Protection?
Anyone who was contributing to a registered pension scheme, who did not already hold a certificate of Primary or Enhanced Protection, could apply for Fixed Protection 2012, 2014 or 2016.
Anyone who was contributing to a registered pension scheme, who did not already hold a certificate of Primary or Enhanced Protection or Fixed Protection 2012, could apply for Fixed Protection 2014.
Anyone who was contributing to a registered pension scheme, who did not already hold a certificate of Primary or Enhanced Protection, Fixed Protection 2012 or Fixed Protection 2014, could apply for Fixed Protection 2016.
If you hold an Enhanced Protection certificate then you could give this up to take up Fixed Protection instead.
If you hold a Primary Protection certificate you could not give this up, and are unable to apply for Fixed Protection.
Are there specific restrictions which apply if I have Fixed Protection 2012, 2014 or 2016?
You can't give up Fixed Protection but from 5 April 2012 (FP 2012), 5 April 2014 (FP 2014) or 5 April 2016 (FP 2016) you will lose your protection if you:
- paid a contribution to a money purchase pension arrangement (personal pension plan, AVCs etc)
- built up further benefits in the NHS pension scheme that exceeds 'benefit accrual'
- built up new benefits in a defined benefit scheme (other than the NHS pension scheme) or in a cash balance pension scheme above benefit accrual
- join a new pension scheme - unless you are only transferring pension savings from one of your existing schemes into the new scheme start saving in a new pension arrangement. The 2015 NHS pension scheme is a new pension scheme for this purpose.
What is Benefit Accrual?
If you have a certificate of Fixed Protection you must test for Benefit Accrual. This is your responsibility and the pensions agencies will not do this for you.
Benefit Accrual will occur if the capital value of your benefits increases by more than the 'relevant percentage' at any time during the tax year.
What is the relevant percentage?
In the NHS pension scheme the 'relevant percentage' is linked to the increases applied to benefits under the scheme rules, which are calculated under the Pensions (Increase) Act 1971, and are currently linked to the Consumer Prices Index.
How do I test for Benefit Accrual?
You need to calculate the capital value of your benefits at the start of each tax year, for example on 5 April 2012. Thereafter if you have reason to believe that you have significant growth in benefits, you need to test for benefit accrual. This means that you could be testing fairly frequently during the tax year.
Further information on testing for Benefit Accrual is available on the relevant pensions agencies web sites:
For members of the
What are the penalties for failing to notify HMRC that I have lost my Fixed Protection?
If Benefit Accrual takes place, you need to establish exactly when that occurred. You are required to notify HMRC within 90 days of Benefit Accrual taking place, resulting in the loss of Fixed Protection. Failure to do so may result in a penalty of up to £300. It is not an automatic penalty and each case will be considered on its own merits. Once the initial penalty is issued there is an automatic daily penalty of up to £60.
What happens if I lose my Fixed Protection?
You will revert to the standard LTA.
If you have lost Fixed Protection 2012 or Fixed Protection 2014 you could apply for Individual Protection 2016.
Whilst FP 2016 remains available this will already have been lost if you have not opted out of scheme membership from 1 April 2016 as Benefit Accrual would take place on any growth after 6 April 2016 as a result of the negative CPI for September 2015. Individual Protection 2016 remains available.
Do I need to opt out of the NHS pension scheme to retain Fixed Protection?
No. However you must test for Benefit Accrual and if this takes place then you will lose your Fixed Protection and revert to the standard LTA.
Please note the exception for tax year 2016/2017 as a result of negative CPI as detailed in the answer immediately above.
If I have opted out to avoid Benefit Accrual, will auto enrolment affect my ability to retain Enhanced or Fixed protection?
If you are automatically enrolled into the NHS pension scheme as a result of auto enrolment then you have one month to opt out again to avoid losing your protection.
Are there any circumstances under which HMRC may consider a belated application for Fixed Protection?
Based on our experience in relation to fixed protection 2012 our understanding is that consideration is limited to the following circumstances:
- HMRC has made an error, and the claim is made shortly after the error has been drawn to your attention, or
- You gave clear notice of your intention to apply for fixed protection before the time limit expired, 5 April 2012, but you did not complete some statutory requirement or you have not specified the claim in sufficient detail for it to be accepted, or
- You have shown that you intended to notify HMRC, but you were prevented from doing so for reasons beyond your control and there was not one else who could reasonably act for you.
HMRC will not consider a retrospective application for Fixed Protection unless you are able to demonstrate that your application was not made on account of one of the above.
Please note that whilst Fixed Protection 2016 has no deadline for application it may not be suitable if you have continued in pensionable service beyond 6 April 2016.
What is Individual Protection?
Individual Protection was first introduced in 2014 to enable individuals who already had pension saving in excess of the reduced standard LTA to retain a personal LTA equivalent to the value of their benefits on 5 April 2014 (capped by the amount of the previous LTA). Individual Protection 2014 enabled you to retain a personal LTA of between £1.25 million and £1.5 million after 5 April 2014. IP 2016 enables you to retain a personal LTA of between £1m and £1.25m.
Can I apply for Individual Protection?
You can apply for IP 2016 if the capital value of your benefits on 5 April 2016 is more than £1 million.
How do I find out the value of my benefits on 5 April 2016?
You need to approach each of your pension providers for this information. You must request a valuation of your benefits on 5 April 2016 (IP 2016).
If you are contributing to the NHS pension scheme in England and Wales
Request this information by completing form AW295
If you are contributing to the NHS Superannuation Scheme (Scotland)
Apply directly to the pensions agency
If you are contributing to the HSC Pension Scheme (Northern Ireland)
Apply directly to the pensions agency
How do I apply for Individual Protection?
Applications are made online directly to HM Revenue and Customs. Please ensure you read the accompanying guidance also available via the link.
Applications for Individual Protection
Can I hold other types of protection with Individual Protection?
Yes. You can apply for Individual Protection 2016 if you currently hold Enhanced Protection, Fixed Protection 2012, Fixed Protection 2014 or Fixed Protection 2016.
If you hold Enhanced Protection, Fixed Protection 2012, Fixed Protection 2014 or Fixed Protection 2016 these take precedence. If this is lost you can revert to Individual Protection.
How does Individual Protection work?
If you hold IP 2014 you will retain a personal LTA equivalent to the capital value of your benefits on 5 April 2014. To qualify for this protection the capital value must be at least £1.25m on 5 April 2014. If the capital value of your benefits is greater than £1.5m you will retain a personal LTA of £1.5 million only.
If you hold IP 2016 you will retain a personal LTA equivalent to the capital value of your benefits on 5 April 2016. To qualify for this protection the capital value must be at least £1m on 5 April 2016. If the capital value of your benefits is greater than £1.25m you will retain a personal LTA of £1.25 million only.
Do I need to test for RBA or Benefit Accrual to retain Individual Protection?
No. There are no restrictions on the growth of your benefits and you cannot lose Individual Protection.
If I join the 2015 scheme will this affect my protection?
Yes. HMRC has confirmed that as the 2015 NHS pension scheme is a new scheme and not a new section of the existing scheme, if you hold Enhanced Protection, Fixed Protection 2014 or Fixed Protection 2016 (acquired before joining the 2015 scheme) your protection will be lost when you join this new scheme.
If you apply for Fixed Protection 2016 after you have joined the 2015 scheme this will not be lost unless Benefit Accrual occurs.