What is the lifetime allowance?
Pension simplification came in to effect from 6th April 2006 to rationalise the British tax system in regards to pension schemes. One of the policies introduced was the lifetime allowance for all UK pensions. The lifetime allowance is the limit on the amount of pension benefits that can be taken without incurring a tax charge. As you can see in the chart below, the lifetime allowance, better known as LTA, was introduced in 2006 with a limit of £1.5m. The limit increased to £1.8m between 2006 – 2010 before decreasing between 2012 – today. The LTA reduced to £1m in 2016/17.
When taking benefits?
When you draw benefits, die before benefits are taken or transfer your pension overseas, a benefit crystallisation event (BCE) will occur and will be tested against your lifetime allowance. If you have a defined contribution scheme, the value of benefits will be tested against the value of your fund. If you have a defined benefit scheme, the value of benefits will be calculated 20x the pension you have accrued plus any tax free cash you have received. If you have been drawing benefits before April 2006, the calculation will be 25x. If the value of benefits exceeds the LTA, there will be a tax charge to pay. It is very important to plan effectively for your retirement to ensure this doesn’t happen. To talk to an advisor to discuss your retirement plan please enquire here today.
What if I’m over the LTA?
The amount of tax you pay on pension savings above the LTA depends how the money is paid to you. The two tax charges are as follows:
- 55% if you tax a lump sum
- 25% if you withdraw the money any other way e.g. pension payment
There are a number of protectors that you could have applied for that protects you against any drop in the LTA such as enhanced and primary protection, which is no longer available or fixed protection and individual protection. To find out more information regarding this please contact us today!
What benefits does a QROPS provide me?
A QROPS (Qualified recognised overseas pension scheme) provides many benefits to someone residing or looking to reside overseas. One of the benefits is that it has no lifetime allowance. The concern a lot of people have is that the limit has been reduced from £1.8m to £1m within the last 4 years, that’s a 45% reduction!! The new policies that will be implemented with UK’s new Prime Minister Theresa May following the Brexit vote to leave are not widely known. The likelihood that the LTA will fall is very high considering the decreases over recent years which means it could significantly affect pensions for anyone residing abroad. If your UK pension is near or exceeding £1m then it would be highly advisable to discuss to a regulated financial advisor to discuss your options. If you are concerned about the LTA decreasing further and you feel that your pension will be in excess of the LTA at retirement, then it would also be highly advisable to talk to a regulated advisor. To find out any information regarding the above article or if you would like to receive a NO cost NO obligation review of your options, please contact us today!