The concept of capping the value of pensions was established on 6th April 2006 (A Day) with the introduction of a lifetime allowance of £1.5 million.
This increased each year to a maximum of £1.8 million in 2012. However, this has since seen a steady reduction to reach a low of £1 million but has since been linked to CPI.(2020/21 – £1,073,100)
The regular changes in the lifetime allowance led to a complicated system of protection which individuals could apply for based upon the total capital value of their pension benefits, or where they no longer contributed to or accrued benefits greater than CPI.
There are now a number of different forms of protection in existence.
Primary protection and enhanced protection were introduced in April 2006.
Fixed protection was introduced originally in 2012 and to this has been added Fixed Protection 2014 and Fixed Protection 2016.
Individual protection was introduced in 2014 and IP2016 has been added since.
Along with the limitations placed on the capital value of pension funds and benefits, the Chancellor has restricted the tax relief available on pension contributions made in any one tax year.
The current annual allowance will start to suffer from tapering where the adjusted income exceeds £240k.
For those in Defined Benefits schemes, they need to add their pension input amount to their earnings, less the personal contributions they have made to the scheme.