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The lifetime allowance

Introduced on 6 April 2006, the lifetime allowance (LTA) was a limit on how much could be taken out of registered pension schemes without an LTA tax charge.

In the 2023 Spring Budget, the Chancellor announced that the LTA would be abolished from 6 April 2024. For the 2023/24 tax year, the LTA still existed and pension schemes still carried out LTA checks when benefits were crystallised, but any crystallising amount that exceeded the individual’s available LTA no longer suffered an LTA charge.

While there weren't any LTA charges in 2023/24, an individual's LTA and whether they had any protection was still relevant when working out the available tax-free cash and the taxation of certain lump sum payments.

The standard LTA in its final years was £1,073,100.

The LTA didn't stop anyone building up funds or benefits greater than the LTA. Any funds above the LTA didn't generate any tax-free cash.

This guide covers how the LTA worked and what happened when benefits were crystallised.

Historic LTA figures

Below are the historic figures for the standard LTA:

From 2018/19 the standard LTA had been set to increase with inflation each year - based on the increase in CPI in the 12 months to the previous September (rounded up to the next £100). However, the Chancellor announced in the 2021 Budget that it was to be frozen at the 2021/22 level for another five years.

Then, in the Spring Budget 2023, the Chancellor announced the LTA would be abolished from 6 April 2024. 

How and when benefits were tested against the LTA

Every time untouched benefits from a pension scheme were brought into payment, a benefit crystallisation event (BCE) occurred. The amount 'crystallised' used up some or all of an individual's LTA, unless the LTA had already been exhausted.

Generally speaking, the amount used was expressed as a percentage of the standard LTA, rounded down to two decimal places. An individual could crystallise benefits on a number of occasions, so the percentages used were added together at each BCE to check if the individual's LTA had been exceeded. If the cumulative percentage exceeded 100% at a BCE, the amount crystallised above the available allowance would have been subject to the LTA tax charge if the BCE occurred before 6 April 2023.

However, for those with enhanced, primary, fixed or individual protection, those with a LTA enhancement factor, or those with a protected low pension age below 50 who took benefits before the minimum pension age (age 55), the way the LTA was used was different. The specific rules for these special cases are explained later in this guide.   

As well as happening when someone brought their pension benefits into payment, BCEs also happened:

• on death before age 75
• on reaching age 75
• on transfer to an qualifying recognised overseas pension scheme (QROPS)

The amount of LTA used up at a crystallisation event depended on the type of benefit being paid. We’ll provide more detail later, but the main benefit types were valued as follows:

Taking tax-free cash usually meant you had to become entitled to a pension at the same time - the lump sum can normally be up to 25% of what is crystallising (although there are some exceptions).

That pension could be paid in a number of ways, but if it's via income drawdown, then there's no need to actually draw an income from the newly created drawdown pot. In the example above, Zara could have taken a taxable income from the crystallised drawdown pot at a later point without using up any further LTA. But accessing the income would trigger the money purchase annual allowance (MPAA), meaning that any future contributions to her SIPP or any other money purchase pension would be limited to the MPAA every tax year.

Pensions already in payment before 6 April 2006

Any pensions that were already in payment before 6 April 2006 (A-Day), whether by annuity, scheme pension, or as drawdown, were tested at the first BCE after 5 April 2006.

If these were the only pensions an individual had, they would never be considered for LTA purposes as there wouldn't be any new BCEs after A-Day.

But if there were uncrystallised benefits, when the first BCE happened the individual's available LTA was reduced by the crystallised value of those pensions already in payment. Then, the actual BCE occurring was tested against the remaining LTA.

If the pre A-Day pensions used up all the available LTA, there wasn't any LTA charge levied on them, but there wasn't any LTA available for the new BCE that was taking place. However, if the new BCE was occurring in 2023/24, there wasn't any LTA charge.

Valuing pre A-Day pensions at the first BCE

Pensions in payment were valued at 25 times the yearly pension at the date of the first BCE, depending on the type of pension:

• Lifetime annuities and scheme pensions - 25 times the yearly pension on the day the first BCE occurred
• Capped drawdown - depended on the date of the first BCE:
  
  
  • First BCE before 6 April 2015 - 25 times the maximum yearly income allowed under capped drawdown on the day that first BCE occurred
  • First BCE after 5 April 2015 - 25 times 80% of the maximum yearly income allowed under capped drawdown on the day that first BCE occurred
• Flexible drawdown and flexi-access drawdown - This depended on the date the pre A-Day drawdown fund first became flexible drawdown or flexi-access drawdown:
  
  
  • Flexible drawdown declaration made in a drawdown year that began pre 27 March 2014 - 25 times the maximum yearly income that could have been paid under capped drawdown when it was designated for flexible drawdown
  • Flexible drawdown declaration made in a drawdown year that began after 26 March 2014 - 25 times 80% of the maximum yearly income that could have been paid under capped drawdown when it was designated for flexible drawdown
  • Flexi-access drawdown (and not in flexible drawdown pre 6 April 2015) - 25 times 80% of the maximum yearly income that could have been paid under capped drawdown when it was designated for flexi-access drawdown

The timing of the first BCE could be critical, especially with a pension in payment that increases every year. If Raj's first BCE had been in 2006/07 instead of 2014/15, the amount of LTA used up by the pension in payment would have been £541,500 (that's 25 x £21,660). This would have represented a much lower 36.1% of the £1.5M LTA in force at that time, leaving Raj with 63.9% of the LTA.

Reaching age 75

Age 75 was a cut-off point for the LTA, with three potential tests happening:

• uncrystallised money purchase funds
• uncrystallised defined benefits
• a second test on drawdown funds

When an individual reached age 75, any pensions that were still uncrystallised at that point were tested against their available LTA. For those who reached their 75th birthday before 6 April 2023, if there had been insufficient LTA, then the LTA charge of 25% would have been levied on the excess (the 55% charge was not an option at age 75).

For those who reached age 75 during the 2023/24 tax year, these tests still happened, but there wasn't any LTA charge if the amount(s) crystallising exceeded the remaining LTA.

There was no obligation to actually bring these pensions into payment at age 75, so it may have been possible to defer taking benefits beyond 75. This will depended on the pension provider and the scheme rules.

Funds in drawdown had a second test at age 75. The value of the funds at age 75 was compared with the original amount that went into drawdown (after the payment of any tax-free cash). If the value at age 75 was higher, the difference between the two figures was what crystallised and was tested against the available LTA.

Drawdown funds created before 6 April 2006 didn't have this test at age 75.

After age 75, there was only one possible further LTA test, and this was if a scheme pension in payment increased by more than the rate allowable. See BCE 3 for further details.

Death

There were three BCEs that could happen on death, but they only occurred when an individual died before age 75. There were no BCEs on death after 75.

Death benefits from pensions already in payment didn't use up any LTA, including the balance paid from a fund in drawdown, but uncrystallised money purchase funds (including the value of any pension term assurance) and lump sums from defined benefit arrangements were tested when paid out within two years of the scheme administrator being made aware (or could reasonably have been expected to be aware) of the member's death.

Uncrystallised money purchase funds can be paid out in two different ways, either as a lump sum or as a pension. This pension could be as an annuity or income drawdown.

These death benefits were tested against the deceased's LTA and the amount used was the amount of lump sum paid, the amount designated for drawdown, and/or the purchase price of the annuity.

Defined benefit schemes can pay out lump sums on death, either as part of the existing retirement benefit scheme or a separate 'death in service' scheme. These are usually set up to pay a multiple of salary as a lump sum. Again, the amount of LTA used was the amount of lump sum paid.

Dependants’ scheme pensions were not tested against the LTA, however, they were subject to income tax.

It should also be noted that lump sums paid out on death from an 'Excepted Group Life Scheme' were not tested against the LTA as they are not 'registered pensions'.

In 2023/24, if there wasn't enough remaining LTA to cover all of the death benefits, there won't be an LTA charge but any part of lump sum death benefits that would have been subject to the 55% LTA charge was taxed at the recipient's marginal rate.

Death benefits paid more than two years after death

Death benefits paid* more than two years after the scheme administrator became aware (or could reasonably have been expected to be aware) of the member's death were not tested against the LTA.

Instead, they were subject to income tax at the recipient's marginal rate (or 45% where a lump sum was paid to a trust). If these benefits had been paid* within the two years, there would have been no income tax liability (because the member died before age 75) - unless the benefits were in the form of a dependant’s scheme pension.

*In this context, paid means:

However, with the removal of the LTA charge in 2023/24, there seemed little reason to deliberately defer paying the death benefits from uncrystallised benefits until after the two year period. The only tax on benefits paid within two years could have been the recipients' marginal rate on lump sum death benefits in excess of the deceased's remaining LTA.

Timing of death BCEs

When testing against the LTA, the value used was the value of the benefits on the date the BCE occurred, not the value at the date of death. For lump sum death benefits, the BCE occurred when the lump sum was paid. For drawdown, it was the date of designating the fund, and for a lifetime annuity, the date the beneficiary became entitled to the annuity.

However, where more than one BCE occurred on death, solely for the purpose of seeing how much lifetime allowance was available, they were all treated as occurring at the same time, immediately before death - although the values used were still the amounts when they were paid (based on the definition above). This meant that they were tested against the LTA in force at the time of death. As the BCEs were deemed to have happened simultaneously, any LTA tax charge liability was allocated fairly where there were multiple recipients.

So if the member died in 2022/23 but the payment/designation of death benefits occurred in 2023/24, there wouldn’t have been any LTA tax to be paid. However, there still could have been marginal rate tax on lump sum death benefits.

Where there was only one BCE on death, it occurred at the point of payment and the amount was tested against the LTA in place at that time.

List of BCEs and how benefits were valued for LTA purposes

BCE 1: drawdown pension
Where funds were designated to provide a member with income drawdown.

The crystallised value was the market value of the funds used.

BCE 2: scheme pension
Where a member became entitled to a scheme pension (whether from a defined benefits arrangement or a money purchase arrangement).

The crystallised value was 20 x the yearly scheme pension.

But if the scheme pension was bought from income drawdown funds, the crystallised value was reduced by the amount originally moved into income drawdown at the outset - to reflect that these funds had effectively already been tested against the LTA through BCE 1 when the funds were designated to provide drawdown.

However, there was no BCE 2 where a scheme pension was purchased from a drawdown pension fund crystallised before 6 April 2006.

BCE 3: excessive increase to scheme pension
Where a scheme pension in payment was increased at any point beyond both the threshold annual rate and the permitted margin.

The crystallised value was 20 x the additional increase.

• Threshold annual rate - this was exceeded where the current scheme pension in payment exceeded the scheme pension in payment a year earlier by more than the higher of RPI, £250 or 5% (although there could have been circumstances where the scheme administrator has agreed a different percentage with HMRC)
• Permitted margin - if the threshold annual rate was exceeded, the scheme pension had to be tested against the permitted margin which, in effect, was an ongoing cost of living increase since the pension came into payment. It was measured on an annual rate of increase of the higher of 5% or RPI (although, again, there could have been circumstances where the scheme administrator had agreed a different percentage with HMRC)

There was an exemption to cover schemes with 50 or more pensioner members, that gave the same rate of increase to all members of a particular class of pensioner, so long as there were at least 20 pensioner members in that particular class. In such circumstances, there was no BCE 3.

Increases made after the member's 75th birthday could still have been caught through BCE 3. This was the only BCE that could apply after the member's 75th birthday.

BCE 4: lifetime annuity purchase
Where a member became entitled to a lifetime annuity, purchased under a money purchase arrangement, except where it was purchased:

• from a drawdown fund after age 75 or
• from a drawdown fund which represented benefits that were crystallised before 6 April 2006

If the lifetime annuity was bought from uncrystallised funds, the crystallised value was the market value of the fund used to buy the lifetime annuity.

But if the lifetime annuity was bought from income drawdown funds, the crystallised value was:

• the market value of the member's income drawdown fund, at the time the lifetime annuity was bought, less
• the amount originally moved into income drawdown at the outset

The reason for this deduction was to reflect that these funds had effectively already been tested against the LTA through BCE 1 when the funds were designated to provide drawdown.

BCE 5: defined benefit test at age 75
Where a member reached age 75 with uncrystallised scheme pension and lump sum benefits from a defined benefit scheme.

The crystallised value was 20 x the yearly scheme pension plus the amount of any separate tax free cash payable.

If tax free cash could only be taken by commuting part of the pension, the crystallised value of the benefits was simply 20 x the yearly scheme pension before commutation.

BCE 5A: test at 75 for drawdown pension
The second test where a member with a drawdown pension fund reached age 75.

The crystallised value was the market value of the member's drawdown fund at 75 less the amount originally moved into income drawdown at the outset (i.e. after the payment of any tax-free cash). The reason for this deduction was to reflect that these funds had effectively already been tested for LTA purposes through BCE 1 when the funds were designated to provide drawdown.

BCE 5A didn't arise where the drawdown pension fund represents benefits that had been crystallised before 6 April 2006.

BCE 5B: test at 75 on unused funds
Where a member reached 75 with uncrystallised money purchase funds.

The crystallised value was the market value of the fund.

Funds in a money purchase scheme don't have to be designated for income drawdown or annuity purchase at age 75, but can be left as 'unused funds'. These funds were tested against the LTA at 75 and, even though benefits weren't coming into payment, an LTA charge could arise.

BCE 5C: drawdown pension for a beneficiary
Where the original member died before age 75 and uncrystallised funds were designated, within two years of the scheme administrator becoming aware (or could reasonably have been expected to be aware) of the member’s death, to provide drawdown for a beneficiary.

The crystallised value was the market value of the fund.

There was no BCE 5C test if the drawdown designation was made beyond the two year period - but any income taken was taxable at the beneficiary's marginal rate of tax, rather than tax free (within the available LTA) if paid within two years.

BCE 5D: lifetime annuity for a beneficiary - where the original member died before age 75 and uncrystallised funds were used, within two years, to provide a lifetime annuity for a beneficiary - but only if the date of death was after 2 December 2014.

The crystallised value was the market value of the fund.

There was no BCE 5D test if the lifetime annuity purchase was made later than two years, or if the date of death was before 3 December 2014. But any income taken would have been taxable, rather than tax free (within the available LTA) if paid within two years and the date of death was after 2 December 2014.

BCE 6: lump sum on crystallisation - where the member became entitled to:

• tax-free cash (also known as a pension commencement lump sum) when uncrystallised benefits were drawn under an arrangement
• an uncrystallised funds pension lump sum (UFPLS)
• a serious ill-health lump sum
• a lifetime allowance excess lump sum

The crystallised value was the amount of the lump sum.

See the section below on Taxable lump sums for how lifetime allowance excess lump sums and serious ill-health lump sums could have had a taxable element when crystallised in 2023/24.

BCE 7: lump sum death benefit - where a lump sum death benefit was paid in respect of the member, either from a defined benefits scheme or from the uncrystallised funds of a money purchase arrangement.

The crystallised value was the amount of lump sum the recipient (or recipients) received.

BCE 7 only occurred if the member died before reaching age 75 and the lump sum was paid within two years of the scheme administrator being made aware (or could reasonably have been expected to be aware) of the member's death.

There was no BCE 7 if the lump sum was paid out after two years - instead it would have been taxed at the recipient's marginal rate of income tax.

The Taxable lump sums section below also covers how lump sum death benefits could have had a tax liability if the BCE occurred in 2023/24.

BCE 8: transfer overseas - where benefits in a UK registered pension scheme were transferred to a qualifying recognised overseas pension scheme (QROPS).

The crystallised value was the total of the funds and the market value of any assets transferred from the scheme.

If any of the benefits had already been crystallised under BCE 1 (drawdown) or BCE 2 (scheme pension) an overlap provision applied - the amount crystallised under BCE 8 was reduced by the amount previously crystallised under BCE 1 or BCE 2.

There was no BCE 8 in respect of any part of a transfer overseas from a drawdown pension fund that represented a pension in payment on 5 April 2006.

A transfer from a UK registered pension scheme to a non-UK pension scheme that wasn't a QROPS didn't trigger BCE 8. Such a transfer is an unauthorised payment.

BCE 9: pension or lump sum errors - where certain pension or lump sum payments were made in error, for example, an overpayment of tax-free cash because the calculation was based on an incorrect level of pension.

The value of the amount crystallised depended on the type of payment made.

Valuing benefits under hybrid schemes for LTA purposes

A hybrid pension scheme can potentially provide benefits on either a money purchase or defined benefit basis. The calculation of the crystallised value was normally dictated by the type of benefits provided.

But if a member of such a scheme reached age 75 without having taken their benefits, the crystallised value was taken as the highest of the values calculated under either:

• BCE 5 - the accrued defined benefit at age 75 or
• BCE 5B - the unused funds at age 75

What wasn't tested against the LTA?

Benefits that were already in payment before 6 April 2006 (A-Day) were not tested, but were taken into account when the first BCE happened on or after that date. If there was no BCE because there were no uncrystallised rights, then pre A-Day pensions would never be considered for LTA purposes.

Certain payments from registered pension schemes were not BCEs and so were not tested against the LTA:

• A triviality payment from a DB scheme or a winding up lump sum from an occupational pensions (though you needed some unused LTA available to qualify for these types of payment)
• A lump sum payment under the small pots rules
• Unauthorised payments
• Dependant's scheme pensions
• A pension protection lump sum payment from a DB scheme

And payments from other types of pensions:

• State Pensions
• Payments from an unregistered scheme, such as an EFRBS
• Paying a pension from benefits built up under an overseas pension schemes (unless any UK relief had been given on contributions to that scheme)*

* Whilst the payment of a pension from an overseas pension scheme generally didn't use up any of the LTA, a transfer of funds from a UK registered pension to a QROPS was a BCE and so used up LTA at the point of transfer.

The LTA tax charge

When did the LTA tax charge apply?

Prior to 6 April 2023, the charge applied at a BCE when there wasn’t enough remaining LTA to cover the value of benefits being crystallised. The LTA tax charge was abolished from 6 April 2023, though the mechanics of testing against the LTA remained in place for the 2023/24 tax year.

If someone took benefits in stages, each BCE used up some of the available LTA. So, even if someone had uncrystallised rights over the LTA, the charge only applied once they crystallised benefits in excess of their remaining LTA.

The chargeable amount was the amount crystallising over the available LTA.

There were two rates of LTA tax charge, and which one applies depended on how the excess was paid.

• If it was paid as a lump sum (known as a lifetime allowance excess lump sum), an immediate LTA tax charge of 55% was deducted before it was paid out. It was only possible to pay a lifetime allowance excess lump sum where the scheme rules allowed it and the BCE occurred before age 75. From 2023/24, any lifetime allowance excess lump sum was taxed at the member's marginal income tax rate.
• If it was used to provide a pension, an immediate LTA tax charge of 25% applied to the excess. Any pension paid was also subject to income tax at the individual's appropriate rate. If the funds were used for income drawdown, no income tax was deducted until funds were withdrawn from the scheme.
  
  For a higher rate taxpayer, the combined effect of a 25% LTA tax charge and income tax at 40% on the pension income equated to an overall tax charge of 55%. This effective rate would have been lower or higher if the individual was taxed on income at a different rate.
• If it was transferred to a QROPS, an immediate LTA tax charge of 25% applied.

Liability for the charge during the member's lifetime

When benefits were crystallised during the member's lifetime, the member and the scheme administrator were equally and separately liable to the whole charge, and payment by one party would reduce the liability of the other.

What this meant in practice was that the scheme administrator always paid the tax charge.

But if they failed to do this because they'd acted on incomplete or incorrect information given by the member, their liability to the tax charge may have been waived if they could have shown that they had acted 'in good faith'. In that case, liability for the charge would have fallen solely on the member.

The member was responsible for completing a self-assessment tax return showing any excess benefits taken and how they were taken, along with the amount of tax paid by the scheme. The scheme administrator would normally have provided the member with the information needed to complete the return. If the scheme administrator had paid the correct amount of tax due, there shouldn't have been any liability for the member.

Liability for the charge on the member's death

If an LTA charge arose on the death of the member (under BCE 7, BCE 5C or BCE 5D) the liability to pay the charge fell on the recipient(s) of the benefits, rather than the scheme administrator.

The scheme administrator would pay benefits in full and the personal representatives of the deceased member were responsible for finding out if a chargeable amount has arisen. If it had, they had to report this to HMRC, who would then assess the beneficiaries.

Where there were multiple beneficiaries, any LTA tax charge liability was apportioned between the beneficiaries on a ‘just and reasonable’ basis, as determined by HMRC.

Taxation of lump sums – tax year 2023/24

Lump sums that would previously have been subject to the 55% LTA charge became taxed at the recipient’s marginal rate of tax.

Member lump sums
For the member, this would cover two lump sums – the lifetime allowance excess lump sum and the serious ill-health lump sum.

The lifetime allowance excess lump sum was where a member took their excess above the LTA as a lump sum. Before 2023/24, the scheme would have deducted the 55% LTA charge before paying this out. In 2023/24 they operated PAYE, on a month 1 basis, using either an emergency tax code or the code from any P45 from the current year.

The serious ill-health lump sum was payable from uncrystallised funds when the member had a life expectancy of less than 12 months. This was usually tax free up to the member’s available LTA. Previously the excess over the LTA would have been taxed at 55% but in 2023/24 it was taxed at the member’s marginal rate.

Death benefit lump sums
On the member’s death, there could be two types of lump sum that may have been subject to the 55% LTA charge, the uncrystallised funds lump sum death benefit and the defined benefits lump sum death benefit.

The uncrystallised funds lump sum death benefit is where the member dies with uncrystallised DC funds and the beneficiary takes them as a lump sum rather than using them for drawdown or to buy an annuity. This might be the recipient’s decision or they might be limited by the options the scheme offers under its rules.

The defined benefits lump sum death benefit is paid by a DB scheme and typically derives from death-in-service style arrangements where a lump sum (usually based on multiple of the member’s pensionable salary) is paid on death.

On death under age 75, when paid within two years of the date of death, both of these lump sums were tax free up to the available LTA, with the 55% LTA charge applying to the excess when paid before 6 April 2023. The charge was paid by the recipients of the death benefits. Where there were multiple BCEs on the death of the member, the legal personal representatives (LPRs) would receive all the details of each BCE from the various schemes and then submit this to HMRC, who would apportion the available LTA to all the BCEs. HMRC would then let the beneficiaries know how much LTA tax charge they had to pay.

In 2023/24, these lump sums remained tax free up to the available LTA, but instead the excess was taxed at the recipient’s marginal tax rates. HMRC have confirmed that the process remained the same for 2023/24 - the scheme would pay out the death benefits in full, the LPRs would inform HMRC of the BCEs, and HMRC would inform the beneficiaries of their marginal rate liability.

Enhancements and restrictions to the standard LTA

Most people were subject to the standard LTA, but there were circumstances where an individual could have been entitled to more or less than the standard amount.

With the removal of the LTA tax charge in 2023/24, having more LTA available could still potentially assist with rights to larger amount of tax-free cash and help reduce the marginal rate tax on lump sums, as discussed above.

A-Day protection (enhanced and primary protection)

When the LTA was introduced on 6 April 2006, HMRC understood that people could have benefits under the old regime greater than the incoming LTA of £1.5M. To help these individuals, two forms of LTA protection were introduced - primary and enhanced protection.

• Primary protection - available to individuals with total benefits (including the value of pensions already in payment) greater than £1.5M as at 5 April 2006. The amount above £1.5M gave them an enhancement factor to apply to the standard LTA for crystallisation events after 5 April 2006.
  
  For example, if total benefits were valued at £1.95M on 5 April 2006, that would give an enhancement factor of 0.30 (the amount of their value above £1.5M, divided by £1.5M). A factor of 0.30 means every time there was a BCE, the standard LTA in place at the time was increased by an extra 30%. For BCEs from 6 April 2012 onwards, £1.8M was used instead of the standard LTA.
• Enhanced protection - anyone could apply for this regardless of the value of their benefits and it gave an exemption from the LTA charge - but only as long as there was no further 'relevant benefit accrual'.
  
  For money purchase schemes, this meant that no more contributions could be made from 6 April 2006 onwards. Any relevant benefit accrual would break enhanced protection at that point and the individual would have to rely on the standard LTA going forward (or any other protected amount they may have).
  
  Defined benefit schemes were slightly more complex as ongoing accrual didn't have to stop at A-Day, but there was a limit on what could be paid out (or transferred to a money purchase scheme) based on the revalued benefits accrued at A-Day. This was known as the 'appropriate limit'. Benefits paid or transferred above this limit was relevant benefit accrual and enhanced protection would have been lost.
  
  As long as enhanced protection was in place as at 15 March 2023 and hadn't been lost by 5 April 2023, relevant benefit accrual could restart from 6 April 2023 without losing the protection.

These protections had to be applied for by 5 April 2009.

Protection from the decreases in the LTA (fixed and individual protection)

The LTA peaked at £1.8M in 2010/11. Since then it dropped on three occasions. It eventually started to increase again, in line with CPI, from 2018/19 onwards, before being frozen from 2020/21 up until the end of 2023/24.

Each time it dropped, HMRC introduced protections to allow people to retain a higher personalised LTA.

Having any of the fixed or individual protections gave an individual their own personal LTA, and whenever any benefits were crystallised while the protection was in force, a percentage of their personal LTA was used up, provided the individual provided information on their protection to the scheme administrator.

Drop from £1.8M to £1.5M - 6 April 2012

Only one option was available:

• Fixed protection 2012 (FP2012) allowed the individual to lock into the £1.8M LTA - provided there was no relevant benefit accrual from 6 April 2012 to 5 April 2023. This meant no contributions to money purchase schemes and any increase in the value of uncrystallised DB benefits must be less than the increase in CPI, the required statutory revaluation rate, or the rate specified in the scheme rules on 9 December 2010.

This had to be applied for before 6 April 2012.

Drop from £1.5M to £1.25M - 6 April 2014

Two options were available for this change:

• Fixed protection 2014 (FP2014) - this worked the same as FP2012, but locked the individual into the £1.5M LTA. Again, relevant benefit accrual before 6 April 2023 would have broken the protection, so from 6 April 2014 this meant no contributions to money purchase schemes and increases in DB benefit values had to be less than the increase in CPI, the required statutory revaluation rate, or the rate specified in the scheme rules on 11 December 2012.
  
  This had to be applied for before 6 April 2014.

• Individual protection 2014 (IP2014) - this gave protection based on the total value of an individual's pension benefits as at 5 April 2014, including any pensions already in payment. If the value came to more than £1.25M, then IP2014 could be applied for and the individual was given their own personal LTA based on that value - but subject to a maximum of £1.5M. Making contributions to a money purchase scheme or having further accrual in a DB scheme would not invalidate this protection, but the protection doesn't increase - so crystallising any benefits above the level of IP2014 would have incurred an LTA charge.
  
  This had to be applied for by 5 April 2017, but it was still based on the value of the individual's benefits on 5 April 2014.

Drop from £1.25M to £1M - 6 April 2016

Two options were available for this change.

• Fixed protection 2016 (FP2016) - this worked the same as the previous versions, but locked the individual into the £1.25M LTA. Again, relevant benefit accrual before 6 April 2023 would have broken the protection, so no contributions to money purchase schemes and DB increases had to be less than the increase in CPI, the required statutory revaluation rate, or the rate specified in the scheme rules on 9 December 2015.
  
  In a change to the previous versions, there was initially no deadline to apply for FP2016. A deadline of 5 April 2025 has now been set.
• Individual protection 2016 (IP2016) - this gives protection based on the value of all the individual's pension benefits as at 5 April 2016, including any pensions already in payment. If the value came to more than £1M, then IP2016 can be applied for and the individual is given their own personal LTA based on that value - but subject to a maximum of £1.25M.
  
  Making contributions to a money purchase scheme or having further accrual in a DB scheme does not invalidate this protection, but the protection doesn't increase - so crystallising any benefits above the level of IP2016 before 6 April 2023 would have incurred an LTA charge.
  
  Similar to FP2016, there was initially no deadline to apply for this protection. A deadline of 5 April 2025 has now been set. 

From 6 April 2023, as long as any of the fixed protections were in place as at 15 March 2023 and hadn't been broken by 5 April 2023, new contributions could begin without invalidating the protection. FP2016 can still be applied for from 15 March 2023 onwards (up until 5 April 2025), but any new contributions/relevant benefit accrual will break the protection as previously.

Having any of the fixed or individual protections gave an individual their own personal LTA, and whenever any benefits crystallised while the protection was in force, a percentage of their personal LTA was used up, provided the individual provided information on their protection to the scheme administrator.

LTA enhancement factors

It was possible for an individual to apply for an enhancement that gave an added amount to their own LTA (whether that's the standard or a protected LTA) in three additional circumstances:

• Where an individual received a pension credit on divorce, which had already been tested against the LTA of the former spouse - could apply using form APSS 201
• Where benefits from a recognised overseas pension scheme (ROPS) were transferred into a UK registered pension - could apply using form APSS 202
• Where contributions had been made, or benefits accrued under a UK registered pension for a 'relevant overseas individual' and no UK tax relief was available - could apply using form APSS 202

Despite the removal of LTA tax charges in tax year 2023/24, there could still be value in applying for these LTA enhancements. They don't increase tax free cash entitlement, but they gave a higher LTA when calculating the taxation of certain lump sum payments over the available LTA.

Primary protection also gives an enhancement factor, as covered earlier.

Calculating the factor

The uplift was calculated by dividing the extra benefits (e.g. pension credit) by the LTA in place when the event that created the right to the higher allowance happened.

If the individual had any of the fixed protections or individual protections in place at that time, they would substitute their own protected LTA for the standard LTA in the calculation.

The factor was rounded up to two decimal places.

Applying the factor

An individual with an enhancement factor had their own LTA plus an additional amount calculated by multiplying the factor by the LTA. However, the LTA to use for this depended on when the event that created the enhancement factor occurred.

• If the enhancement event happened between 6 April 2006 and 5 April 2012, the increase to the individual's LTA was calculated by multiplying an underpinned LTA of £1.8M (or the standard LTA if greater) by their enhancement factor
• If the event happened between 6 April 2012 and 5 April 2014, the increase to the individual's LTA was calculated by multiplying an underpinned LTA of £1.5M (or £1.8M if FP2012 applied) by their enhancement factor
• If the event happened between 6 April 2014 and 5 April 2016, the increase to the individual's LTA was calculated by multiplying an underpinned LTA of £1.25M (or £1.8M if FP2012 applied, £1.5M if FP2014 applied or their personal LTA under IP2014) by their enhancement factor
• For events after 5 April 2016, it was calculated by multiplying the standard LTA in force when the BCE took place (or if higher, £1.8M if FP2012 applied, £1.5M if FP2014 applied, £1.25M if FP2016 applied or their personal LTA under either IP2014 or IP2016) by their enhancement factor.

Once the additional amount of LTA had been worked out, it was added to the individual's LTA, which was either the standard LTA or their own personal LTA, if they had any of the fixed or individual protections.

While an LTA enhancement factor gave extra LTA, it didn't increase the amount of tax-free lump sum available. This was normally based on 25% of the standard LTA, or 25% of any protected LTA under fixed or individual protection. But there were other circumstances where tax free lump sum rights could have been more or less than 25% of the LTA.

Restricted LTA - low pension ages

Before 6 April 2006 it was possible to have retirement ages lower than the current minimum pension age of 55. Those below age 50 were usually in respect of special occupations, such as professional sports players.

Individuals who had a scheme with a low pension age before 6 April 2006 could retain it after that date, subject to certain criteria.

If an individual with a protected pension age below age 50 crystallises benefits before the normal minimum pension age, there was a reduction in the LTA available to them at that point. For every complete year before the current normal minimum pension age, the LTA was reduced by 2.5%.

Those with a protected pension age between 50 and 55 didn't have this reduction.

The reduction was against the standard LTA, or an individual's protected LTA if they had one of the fixed or individual protections, or their LTA plus any LTA enhancement factor they were entitled to.

In 2023/24, exceeding this reduced LTA didn't incur an LTA charge, but it could have had an effect on the maximum tax-free cash that could have been paid.

If the individual drew other benefits later, the amount already taken at the special low pension age had to be taken into account. But as long as the new benefits were being taken after the normal minimum pension age, they were tested against the individual's remaining unreduced LTA.

The amount crystallised at the early pension age was revalued by multiplying it by the LTA at the new BCE, divided by the full unreduced LTA at the early pension age.

Information and reporting requirements

During the member's lifetime

At a BCE during a member's lifetime, the member had to tell the scheme administrator:

• if they have any form of protection (enhanced, primary, fixed or individual) or LTA enhancement factor, so the correct LTA could be used
• the answers to any questions regarding the amount of LTA already used from previous BCEs
• if they had any pension that came into payment before 6 April 2006, and
• if they were crystallising benefits under any other schemes before or at the same time as benefits under this scheme

If two or more BCEs occurred on the same date, the member decided the order they were crystallised. Prior to 2023/24, where there was insufficient LTA to cover all the BCEs, this allowed the member to choose which scheme(s) ended up paying the LTA tax charge.

The scheme administrator had to give the member a statement which showed how much LTA had been used up under the scheme, expressed as a percentage of the standard LTA (or protected LTA if any fixed or individual protection applies), rounded down to two decimal places.

Prior to 2023/24, if there wasn't enough LTA and a chargeable amount had arisen, the scheme administrator also had to provide a notice, within three months, confirming:

• the chargeable amount
• how it was calculated
• the amount of LTA tax charge due and
• whether they've already accounted for the due tax, or if they intend to do so at a later date. This information is provided to enable the member to complete their self-assessment tax return

If a scheme was paying a pension to a member (or where a member who had designated funds to provide income drawdown, but wasn't actually drawing a pension) the scheme administrator had to provide that member with a statement every tax year confirming the total percentage of the standard LTA that the member had used up by BCEs under that scheme. This should have included BCEs relating to rights crystallised under another scheme which subsequently transferred into the scheme, but not any that relate to rights that had been transferred out of the scheme.

On death

The personal representatives of the deceased member were responsible for finding out if there was enough available LTA to cover the amount crystallising. They should have taken account from the deceased's records of any LTA used up by BCEs that took place during the deceased's lifetime. If they didn't have sufficient information, they could ask the relevant scheme administrator or insurance company who were obliged to provide certain information to them.

Where there were any BCEs on death, the scheme administrator had to provide details to the personal representatives within three months of the BCE.

The consequences of giving false information

Before 2023/24, if someone gave false information to the pension scheme administrator at a BCE, whether fraudulently or negligently, they'd be liable to a penalty of up to £3,000 if it resulted in avoiding an LTA tax charge.

If it wasn't a false statement about an entitlement to an increased LTA (again whether fraudulently or negligently) they'd be liable to a penalty of up to 25% of what is called the 'relevant excess'.

Potentially, both of the above penalties could apply.

In addition, the scheme administrator could have requested to be discharged from their liability to the LTA charge if they had acted in good faith. If the request was granted by HMRC, the individual became solely liable for the outstanding LTA tax charge.