The lifetime allowance is the measure of the value of pension benefits taken at a pension event, for example at retiral. However, there is a limit on the amount of benefits that can be taken before they become subject to a tax charge.
The rate of tax charged will depend on whether the excess is taken in as a pension or a lump sum. The lifetime allowance charge is:
- 25% where it is taken as a taxable pension income, and
- 55% if the excess is taken as a lump sum (the teachers regulations do not permit a member to take an excess lump sum – please refer to example 4 and 5)
The lifetime allowance charge is paid by the scheme administrator and the members benefits are permanently reduced to recoup the charge. Members may have applied to HMRC and hold valid lifetime protection and have a personal lifetime allowance that is higher than the standard lifetime allowance.
The historic level of lifetime allowance is set out below:
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The Standard Lifetime Allowance is reducing to £1 Million from 6 April 2016
In the Summer Budget 2015 the Chancellor announced a reduction in the standard lifetime allowance from £1.25 million to £1 million from 6 April 2016, remaining at this level for tax years 2016/17 and 2017/18. From 6 April 2018 the standard lifetime allowance will be indexed annually in line with the Consumer Prices Index (CPI).
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Legislation for the reduction in the standard lifetime allowance will be delivered in Finance Act 2016.
The capital value of benefits being measured for lifetime allowance purposes is calculated as 20 x the pension plus the amount of any lump sum being paid.
A standard lifetime allowance of £1 million will affect members who take their benefits when they:
retire with a payable date on or after 6 April 2016 and the date benefits are authorised is on or before 5 April 2016; or
retire with a payable date before 6 April 2016 and the date benefits are authorised is on or after 6 April 2016.
Therefore any delay in claiming benefits may result in these and any subsequent benefits:
a bigger percentage of the lifetime allowance being used up as these and any subsequent benefits taken will be valued against the lower standard lifetime allowance of £1m; or
a lifetime allowance charge or increased lifetime allowance charge.
Important Action for Employers
Retiring members who want to take advantage of the higher lifetime allowance of £1.25 million must have a last day of pensionable membership, including annual leave entitlement, of 4 April 2016 or earlier. As a result the completed retirement application form must be with HSC Pension Service as soon as possible
This is essential for those retiring members who have enhanced protection, as there is a statutory requirement on HSC Pension Service to check for Relevant Benefit Accrual (RBA) before benefits are authorised.
Where benefits fail RBA test the member may have scope, within the Pension Scheme regulations, to ‘rearrange’ their benefits to try and remain within the RBA limits. Where this is possible HSC Pension Service will notify the member of this before benefits are authorised. Possible rearrangement of their benefits would ensure that their enhanced protection remains valid so that they can rely on this protection before benefits are crystallised.
To allow members to consider how they might be affected by the reduced lifetime allowance employers should bring the lifetime allowance
reduction to the attention of those members who are planning to retire during:
- the last quarter of 2015/16, and
- the first quarter of 2016/17.
This includes members who have already confirmed their intention to retire.
For members who are intending to retire on or before 5 April 2016 employers must ensure that their pension record is updated and the complete retirement application is with HSC Pension Service with sufficient time for the awarding process to be completed that allow for benefits to be authorised before 6 April 2016.
HSC Pension Service cannot accept responsibility for any delay in authorising benefits if the retirement application form is delayed, incomplete or the member has enhanced protection.
Any revision to benefits (a substitute award) is a separate crystallisation of benefits and if any additional benefits are authorised on or after 6 April 2016, these will be based on the reduced lifetime allowance of £1 million.
Calculation of the reduction in benefits on account of the LTA charge
Members who have a capital value of benefits in excess of £1 million will be subject to a lifetime allowance charge unless they hold a HMRC lifetime allowance protection certificate that has a value equal or more to the benefits that are being taken.
The lifetime allowance charge is:
- 55% if the excess is taken as a lump sum, and
- 25% where it is taken as a taxable pension income.
The lifetime allowance charge is paid by the scheme administrator and benefits are permanently reduced to recoup the charge. The factors that are applied to calculate the reduction in benefits have been supplied by the scheme actuary and these are age related; there are separate factors for members retiring on the grounds of ill-health and those who retire on any other grounds.
The reduction in pension on account of a lifetime allowance charge will affect any future entitlement to a surviving adult pension, but not a child’s pension.