Lifetime Allowance - frequently asked questions

A: The lifetime allowance creates a ceiling on the benefits value that can be built up by a member in all registered pension schemes. If the benefits value exceeds the lifetime allowance when benefits are taken, the difference between the two is subject to the lifetime allowance charge, unless the individual has primary, enhanced, fixed protection or individual protection where a different lifetime allowance may apply.

Rates & Factors - Standard Lifetime Allowance

PTM081000: Essential principles of the lifetime allowance

A: Defined benefit schemes can only offer a scheme pension. A scheme pension involves paying a pension for life out of the scheme assets or buying an annuity out of the scheme assets.

The value of the annual amount of pension promised by the scheme is multiplied by a standard valuation factor of 20:1. Where some of the pension is commuted for a lump sum, it is the pension after commutation that is multiplied by the standard valuation factor of 20:1. This factor includes an allowance for dependant's benefits up to the level of the member's pension at date of death and for annual increases of 5%. Any defined benefit scheme that provides better increases can apply to HM Revenue and Customs for a scheme specific valuation factor which can be higher than 20:1.

Lump sums (including those provided by commutation) are valued using a factor of 1:1 and are added to the above value.

PTM088620: The amount crystallising through BCE 2 and relevant valuation factors

PTM088620: A non-standard relevant valuation factor

PTM088670: Calculating the crystallised value of the relevant lump sum paid

A: If the member chooses to take their benefits using drawdown then the valuation basis is based on the actual fund value (market value of the assets) used to secure either: 

  • Flexi-access drawdown, or
  • Short-term annuities

If the member chooses to take a secured income then the valuation basis used depends on the option chosen when benefits are crystallised. These are:

  • Lifetime Annuity - The benefits will be valued on the basis of the actual fund value used to secure the lifetime annuity.
  • Scheme Pension - A scheme pension involves paying a pension for life out of the scheme assets or buying an annuity out of the scheme assets. The value of the annual amount of pension promised by the scheme is multiplied by a standard valuation factor of 20:1. This factor includes an allowance for dependants' benefits up to the level of the member's pension at date of death and for annual increases of 5%. Any scheme that provides better levels of dependants' pensions or increases can apply to HMRC for a scheme specific valuation factor which can be higher than 20:1.

    Tax-free cash will be valued based on a valuation factor of 1:1 and added to the value above.

PTM088610: Designation of funds for drawdown pension during the member's lifetime

PTM088620: The amount crystallising through BCE 2 and relevant valuation factors

PTM088620: A non-standard relevant valuation factor

PTM088670: Calculating the crystallised value of the relevant lump sum paid

A: The lifetime allowance creates a ceiling on the benefits value that can be built up by a member in all registered pension schemes. If the benefits value exceeds the lifetime allowance when benefits are taken, the difference between the two is subject to the lifetime allowance charge. The lifetime allowance charge can be applied in either of two ways or a combination of both depending on how the excess benefits value above the lifetime allowance is taken. The charge is:

  • 55% if taken as a lump sum, or
  • 25% if taken as income.

 PTM081000: The lifetime allowance charge

A: If a member decides to take their benefits in stages then a percentage of the lifetime allowance will be used up each time that they take benefits.

PTM081000: Operation of the lifetime allowance over time

A: Members who had benefit values at 6 April 2006 of over £1.5 million could have applied for primary protection to reduce or eliminate the chance that a lifetime allowance charge will apply. Their pre 6 April 2006 tax-free cash could also be protected in certain circumstances.

Enhanced protection completely eliminates the risk of a lifetime allowance charge and in certain circumstances protects the pre 6 April 2006 tax-free cash entitlement. Where enhanced protection is chosen, no further contributions can be paid after 6 April 2006 to money purchase schemes and benefit accrual after 6 April 2006 is restricted in defined benefit schemes.

A member who registered for fixed protection 2012 before 6 April 2012 could keep a lifetime allowance of £1.8 million after 6 April 2012, when the lifetime allowance reduced to £1.5 million. Anyone who opted for fixed protection 2012 had to stop being an active member of all registered pension schemes prior to 6 April 2012. It is no longer possible to apply for fixed protection 2012.

A member who registered for fixed protection 2014 before 6 April 2014 could keep a lifetime allowance of £1.5 million after 6 April 2014, when the lifetime allowance reduced to £1.25 million. Anyone who opted for fixed protection 2014 had to stop being an active member of all registered pension schemes prior to 6 April 2014. It is no longer possible to apply for fixed protection 2014.

A member who registers for fixed protection 2016 keeps a lifetime allowance of £1.25 million after 6 April 2016, when the lifetime allowance reduced to £1 million. Anyone who opts for fixed protection 2016 had to stop being an active member of all registered pension schemes prior to 6 April 2016. There is no deadline for applying for fixed protection 2016.

Individual protection 2014 gave members who thought that the value of their benefits would be over the lifetime allowance when they came to take their benefits, a personalised lifetime allowance based on the value of their pension savings at 5 April 2014 (up to a maximum of £1.5 million). It allowed members whose pension rights were valued at over £1.25 million (the lifetime allowance from 6 April 2014) to protect those rights, subject to an overall maximum of £1.5 million. A crucial difference from fixed protection 2014 is they can still be an active member of a pension scheme. Members could apply for individual protection 2014 up until 5 April 2017.

It was possible to apply for individual protection 2014 if the member already had fixed protection 2012, fixed protection 2014 or enhanced protection, but not if the member already has primary protection. It is no longer possible to apply for individual protection 2014.

Individual protection 2016 

gives members who think that the value of their benefits will be over the lifetime allowance when they come to take their benefits, a personalised lifetime allowance based on the value of their pension savings at 5 April 2016 (up to a maximum of £1.25 million). It allows members whose pension rights are valued at over £1 million (the lifetime allowance from 6 April 2016) to protect those rights, subject to an overall maximum of £1.25 million. A crucial difference from fixed protection 2016 is they can still be an active member of a pension scheme.

It is possible to apply for individual protection 2016 if the member already has fixed protection 2012, 2014 and 2016 or enhanced protection, but not if the member already has primary protection.

There is no deadline for applying for individual protection 2016.

PTM091000: Protection from the lifetime allowance charge: essential principles

A: Benefits are only measured against the lifetime allowance when they are taken. Taking his occupational scheme benefits uses up 80% of the lifetime allowance (£844,000/£1,055,000), leaving 20% of the lifetime allowance available. If the lifetime allowance is still £1,055,000 when he takes his personal pension benefits he would be able to take benefits worth up to £211,000 (20% of £1,055,000) before a lifetime allowance charge would apply. 

PTM081000: Operation of the lifetime allowance over time

A: It depends how he takes the excess benefit.

He can take it as a lump sum, in which case the lifetime allowance charge would be 55%. The scheme administrator would therefore deduct £110,000 (£200,000 x 55%), pay this to HMRC and pay Steven the balance of £90,000. This would be in addition to any tax-free cash he took from his pension scheme.

If he uses the excess benefit to provide extra income, the charge would be 25% and the actual amount available to provide further income would be £150,000 (£200,000 x 25%).

This is equivalent to the 55% charge for lump sums because the pension will almost certainly be liable for income tax at a rate of 40%. So, in our example, a 40% tax charge applied to the £150,000 used to provide pension would produce tax of £60,000. The 25% lifetime allowance charge on the whole fund produces £50,000. The total tax deduction is therefore £110,000 which is 55% of the fund as before.

 PTM081000: The lifetime allowance charge

A: There is no BCE when he dies. This is the case whether he has crystallised or uncrystallised benefits when he dies. There will have been a BCE at age 75 anyway, so a test against the lifetime allowance would have happened then. 

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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Last updated: 05 Apr 2019

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.