The standard lifetime allowance is £1.5 million in 2013/14, falling to £1.25 million in 2014/15.
If you have a large pension pot and are concerned that you may exceed the lifetime allowance at retirement, do not worry, we can help.
The Lifetime Allowance is a limit on the value of benefits from your pension schemes – whether lump sums or pension income – that can be paid out without triggering an extra tax charge.
People are working longer and retiring later, investment markets are offering substantial areas for growth and the lifetime allowance for pensions is decreasing. These factors contribute to concerns that more and more people will be growing their pension pots in excess of the allowance limit and provides individuals with a difficult decision surrounding the taxation of their retirement fund. Thankfully, through the introduction of ‘Fixed Protection’ and ‘Individual Protection’ coming into force in 2014, individuals facing these issues now have a solution. Please click here to access a helpsheet, detailing both types of protection and how they can help.
If this is an issue for any of our MAC Club members, we will be guiding them through the options and prompting the actions to take. If you are not a MAC Club member, please feel free to get in touch for more information.
Am I near the lifetime limit?
You should consider the value of all your private and work pensions:
- The current fund value of money purchase pensions which have not been used to provide tax-free cash, an annuity, income drawdown or any other pension benefits.
- 20 x the annual pension due from any final salary pensions, plus any additional tax-free cash.
- 25 x any annual pension in payment before 6 April 2006, as at the date you first took pension benefits after 5 April 2006.
- The percentage of the lifetime allowance used up by pension benefits taken since 5 April 2006, as stated by that pension provider. This percentage does not change when the lifetime allowance changes.
What is the calculation for measuring the lifetime allowance?
Whenever you take benefits from a pension, you use up a percentage of the lifetime allowance. This process can be referred to as a Benefit Crystallisation Event (BCE). For example, a pension fund worth £150,000 from which you take benefits in 2013/14 will use up 10% of the lifetime allowance.
Each time your pension is measured against the lifetime allowance you will receive a certificate showing the percentage of the standard lifetime allowance used. Unless you hold lifetime allowance protection, using up more than 100% of the standard lifetime allowance will result in a tax charge.
When is the lifetime allowance calculated?
- You use your pension fund to buy an annuity, move into drawdown or take tax-free cash before 75. The percentage is based on the value of the pension fund used. If you buy an annuity from drawdown the value used is reduced so that only the growth on those funds since you moved into drawdown is taken into account.
- You start to receive tax-free cash and/or a pension from a final salary pension scheme before 75. The percentage is based on the annual pension payment and tax free cash amount.
- You reach 75 with pension benefits which you have not taken or which are in drawdown. If you are in drawdown the value is reduced so only the growth since you move into drawdown is taken into account. If the fund value at 75 is lower than the amount moved into drawdown there will be nothing additional to measure against the lifetime allowance.
- You die before 75 without having taken pension benefits and the fund is paid out as a lump sum. The percentage is based on the value of the lump sum.
- You transfer to a Qualifying Recognised Overseas Pension Scheme before 75. The percentage is based on the value of the transfer.
- You have an excessive increase on a scheme pension in payment, such as a final salary pension.
- Various one-off payments from a pension scheme may also be measured against the lifetime allowance.
Do i need to notify my pension provider?
They need to know whether taking these pension benefits will put you over the lifetime allowance and will therefore typically ask one or two questions:
- Have you started to take pension benefits since 5 April 2006? If so, what percentage of the lifetime allowance have you already used? This figure can be found on the certificate issued when taking benefits.
- If not, are you already receiving any pensions that started before 6 April 2006? If so, they will ask for the latest annual income. If you have an income drawdown plan you should state the maximum annual income you could take, not your actual income. Alternatively, they may simply ask you whether you are likely to exceed the lifetime allowance by taking these benefits.
How will I be affected if I exceed the lifetime allowance?
Most people will never exceed their lifetime allowance. If you exceed the lifetime allowance you can:
- Take the excess as a lump sum before 75, less a 55% lifetime allowance charge
- Retain the excess in the pension fund, before or after 75, less a 25% lifetime allowance charge
Pension income is taxable. For example, the combination of 40% income tax and a 25% lifetime allowance charge could be broadly equivalent to a 55% lifetime allowance.
Is there any way of me protecting myself against this tax charge?
Please click here for our simplified document on ‘Fixed Protection’ and ‘Individual Protection’. This helpsheet outlines the options available for individuals concerned with exceeding the lifetime limit.