Lifetime allowance

If your benefits exceed the limit then the amount over this limit could be taxed by up to 55%.  This limit is called the lifetime allowance and for the 2006/07 tax year is set at £1.5 million. 

The lifetime allowance has been fixed up to and including the 2010/11 tax year, as follows:

• 2007/08 - £1.6m
• 2008/09 - £1.65m
• 2009/10 - £1.75m
• 2010/11 - £1.8m

Future allowances will be determined every five years.

For anyone who currently exceeds or is likely to exceed the lifetime allowance the Government has set up two forms of protection.

1. Primary protection, and
2. Enhanced protection.

The first of these, primary protection, affords protection to anyone who has pension benefits that exceeded the £1.5m limit on 5 April 2006.  This will basically avoid the tax charge on the amount by which your benefits exceeded the lifetime allowance as at 5 April 2006.  Protection in respect of further benefit growth will be linked to future increases in the lifetime allowance.

The second form of protection, enhanced, can give protection to benefits either under or over the lifetime allowance.  In this case, the whole of the benefits are protected.  However, no further savings can be made into a registered pension scheme after 5 April 2006 or this protection will be lost. 

A change is due to be brought in under the Finance Bill 2006, which will allow continued payment of insurance premiums into a registered pension scheme to fund death benefits, without losing enhanced protection.  Our understanding is that the level of death benefits payable would be the benefit due as at 5 April 2006, although final details are still to be determined.

Anyone who has £1.5m or more in pension benefits as at 5 April 2006 can opt for either or both of these forms of protection and has until 5 April 2009 to register.

If you feel that you may be impacted by the lifetime allowance either now or in the future, please speak to your adviser as soon as possible.