The Lifetime Allowance refers to the total value of your pension benefits. The current limit permissible without attracting additional tax charges is limited to £40,000 (reduced from £50,000 with effect from April 2014).
Issues that could affect your potential to exceed the allowance
- If you have any other pension benefits (not including the state pension) the value of these should be added to the value quoted.
- If your salary increases this will directly increase the value of your benefits accrued as all benefits accrued to date are on a final salary basis.
- There are currently proposals to change the accrual or pension build up rate in 2015, this may mean future benefits are accrued at a faster rate.
- You may choose to work beyond age 60 therefore building up additional service and connected pension benefits.
- The value of the allowance is set by the Government, should they reduce the allowance this would bring more employees into ‘scope’, equally this could be increased therefore reducing the numbers involved.
What taxation would be charged should I exceed the allowance?
How does the calculation of Lifetime Allowance work?
Example A: Based on an annual pension of £50,000 with a lump sum of £125,000
Annual pension x 20 Plus lump sum = £1,125,000, well within the allowance
Example B: Based on annual pension £75,000 plus £200,000 lump sum
Lump Sum of 25% of lifetime allowance (£375,000) no charge. Allowance for annual pension £1,500,000 less £375,000 (£1,125,000)
Annual pension £75,000 x 20 = £1,500,000
£375,000 x 25% over 20 years leads to deduction of £4687.50 permanent reduction from annual pension
Leaving benefits of £59,375 Annual Pension and £375,000 lump sum payable.
Applying for fixed protection
The current limit permissible without attracting additional tax charges is £1.5m. This limit will reduce to £1.25m from April 2014, however any member whose benefits already exceed this value will be able to apply for fixed protection to avoid any sudden reduction to accrued pension benefits. In addition HMRC will be introducing Individual protections which members will be able to apply for from September 2014.
Applying for individual protection 2014 (IP2014)
As well as fixed protection 2014, the Government has announced that IP2014 will be available when the lifetime allowance is reduced to £1.25 million for 2014-15.
Final details of how IP2014 will operate in practice will be confirmed by HMRC in due course and were the subject of a formal government consultation last year. It is however expected that:
- it will give you a lifetime allowance equal to the value of your pension rights on 5 April 2014 - up to an overall maximum of £1.5 million.
- you will not lose individual protection 2014 by making further savings in to your pension scheme
- any pension savings in excess of your lifetime allowance will be subject to a lifetime allowance charge
You will be able to apply for this protection from 6 April 2014 and it will also be possible to hold both FP2014 and IP2014 in due course. Details of the formal consultation and responses can be found at the following link: https://www.gov.uk/government/consultations/pensions-tax-relief-individual-protection-from-the-lifetime-allowance-charge