Your lifetime allowance questions answered
The members of our pension schemes often ask about the different ways that the lifetime allowance can affect their retirement benefits. Here’s a selection of the most frequently asked questions relating to this topic.
What is the lifetime allowance?
The lifetime allowance is the overall amount of pension savings you can have at retirement without incurring a tax charge.
The current standard lifetime allowance has been set at £1,055,000. It has been higher in previous years and, some people may qualify for protections from recent decreases in the level of lifetime allowance, meaning they may qualify for a higher personal lifetime allowance than the standard rate.
See further questions below on protections.
How is the value of my pension calculated for lifetime allowance purposes?
The lifetime allowance is based on the capital value of benefits taken from your pension savings. For the defined benefit schemes we operate, there’s a simple calculation to work out how much of your lifetime allowance you’re using up when you ‘crystallise’ a benefit.
Basically, the capital value is considered to be 20 x your annual pension + any lump sum. Here’s a typical example to help you calculate how much lifetime allowance you’re likely to use up on retirement. We’ve based it on a pensionable salary of £100,000 for a member with 25 years' service in a scheme where they earn 1/80th of their career average revalued earnings for every year of service. We’ve also assumed they take a lump sum equal to 3x their annual pension amount.
Calculate the annual pension
25/80 x £100,000 = £31,250 (pension)
Calculate the lump sum
£31,250 x 3 = £93,750
Multiply the annual pension by 20
£31,250 x 20 = £625,000
Add the lump sum
£625,000 + £93,750 = £718,750
Work out the percentage of lifetime allowance used
£718,750 ÷ £1,055,000 x 100 = 68.12%
In this example, the ‘crystallisation’ of the lump sum and the annual pension would not exceed the lifetime allowance limit. In fact, a further 31.88% of allowance could still be used in the future before any benefits taken attracted a tax charge.
Am I at risk of exceeding my lifetime allowance?
The current lifetime allowance is £1,055,000 million. That’s broadly equivalent to crystallising the following benefits:
- an annual pension of £52,750 if you don't take a lump sum
- an annual pension of £45,869 if you take the standard tax-free lump sum
- an annual pension of £39,562 if you take the 25 per cent maximum tax-free lump sum.
What happens if I have other pension savings in addition to my SPPA-administered benefits?
The lifetime allowance covers all of your pension arrangements apart from your State Pension entitlement.
One reason your benefits will be tested against the lifetime allowance would be if you take a benefit from any of your pension pots.
When are my pension savings tested against the lifetime allowance?
Although we provide a lifetime allowance estimate on all our annual pension statements, in practice, your lifetime allowance only starts being used up at what HMRC calls ‘benefit crystallisation events’. The most common ‘events’ are taking an annual pension or a lump sum from your pension but other events triggering a lifetime allowance test include:
- reaching age 75, in certain circumstances
- transferring your pension to a qualifying recognised overseas pension scheme
- if a pension you're getting increases beyond a certain limit
- on the payment of certain lump sums such as serious ill health or some types of death benefits.
On all of these ‘events’ your scheme administrator will value your pension savings and check if they're worth more than the lifetime allowance. Technical guidance is also available from the HMRC website.
When do my benefits crystallise?
For the purposes of the lifetime allowance your benefits crystallise on the date that you had an actual right to receive your benefits. This date is the later of:
- the payable date; or
- the date benefits are actually authorised by SPPA.
What if my current pension rights mean I've already exceeded my lifetime allowance?
In some cases, you may be able to apply for:
- Fixed Protection 2016
- Individual Protection 2016
Other types of protection are now closed to new applicants.
For more information on Fixed and Individual Protection , please see the HMRC website.
You may also want to consider taking independent financial advice.
Can I lose my fixed protection?
To keep any of the Fixed Protections allowed since 2012, you:
- cannot start a new pension arrangement (although you can accept a transfer of existing pension rights)
- cannot have benefit accrual (if growth in their benefits exceeds CPI for the relevant period).
The protections are also subject to restrictions on where and how you can transfer benefits.
You’ll lose fixed protection if you break any of the conditions. If you lose your fixed protection for any reason, you’ll revert to the standard lifetime allowance and any tax charge will be based on that.
It’s your responsibility to check and report any loss of protection to HMRC within 30 days
What’s the maximum tax free lump sum possible if I have protection?
If you have LTA protection, your maximum tax free lump sum will be 25% of the lower of:
A. the capital value of the benefits that you're taking; or
- £1.8m for Fixed Protection 2012
- £1.5m for Fixed Protection 2014
- £1.25m for Fixed Protection 2016
- The value of your lifetime allowance as at 5 April 2016 for Individual Protection 2016
- The value of your lifetime allowance as at 5 April 2014 for Individual Protection 2014
- £1.5m for Enhanced Protection
- £1.5m for Primary Protection
Who tests for benefits being over the relevant percentage for Fixed Protection?
It’s your responsibility to check and report any loss of protection to HMRC within 30 days.
What are the rates for the lifetime allowance tax charge
The charge is paid on any excess over the lifetime allowance limit. The rate depends on how this excess is paid to you.
If the amount over the lifetime allowance is paid as a lump sum - the rate is 55%.
If it’s paid as a pension income, the rate is 25%.
Would Auto Enrolment affect my Fixed Protection?
If you have a Fixed Protection and your employer automatically enrols you into a qualifying workplace pension scheme, you’ll have 3 months to opt out.
If you opt out within that 3 month period, the law treats you as if you were never a member of the pension scheme and you’ll keep your Fixed Protection.
If you don’t opt out in time, you’ll lose your Fixed Protection.
If you keep your employer informed and provide sufficient evidence of your protection status your employer may be able to apply an exemption to auto enrolment.
Will I lose Fixed Protection if I become a member of the 2015 Scheme?
What is the limit for Trivial Commutation?
The trivial commutation limit effective from 27 March 2014 is £30,000. To take a trivial lump sum, the member's pension benefits from all schemes must be less than £30,000.
Further information on the LTA can be found on the HMRC website.
What if I have benefits in both pre-2015 and post-2015 schemes?
The final salary and 2015 CARE schemes are registered separately with HMRC. If you were already a member prior to 2015 and were transitioned to the new 2015 scheme and have benefits in both schemes, these benefits will crystallise separately. This means if you’re over the lifetime allowance, you’ll have to choose which scheme benefits you want to crystallise first.
If you think you could exceed the lifetime allowance limits and you’re unsure about how this could affect your retirement planning, it may be worth taking independent financial advice