For Pensions Awareness Week – an example of the pension questions we receive, helping you better understand your pension.
I do not intend to leave service for a long time yet but I am worried that I might exceed my Lifetime Allowance and incur a tax charge. Can you please explain how this works? I have pension accrual on the 75 Scheme and the 15 Scheme.
Lifetime Allowance (LTA) is a tax charge base on the overall value of the pension fund. The current LTA limit is £1,073,100 and if the pension fund value breaches this limit then you will be liable for a tax charge this limit increases each year in line with inflation. However the pension is only assessed against LTA at the point it comes into payment. This is known as a Benefit Crystallisation Event (BCE). Therefore you will not be assessed for a breach of LTA until you retire and your pension comes into payment. Retirement at this point in time would see your 75 scheme pension put into payment immediately but the pension element of your 15 Scheme will not come into payment until you reach state pension age or you request early payment of your pension. Early Departure Payments (EDP) is not pension and does not get assessed against LTA.
Assessment of LTA is calculated by multiplying the annual pension by 20 and adding any lump sum. Assessment would work like this:
Using an annual pension of £30,000 (75 Scheme) with 15 Scheme deferred pension at State Pension Age.
(£30k x 20) + £90k (lump sum) = £690,000
Therefore as his does not exceed the LTA limit it is expressed as a percentage.
£690,000 / £1,055,000 x 100 = 65.40% usage.
This means that you would have 34.6% remaining. When the 15 Scheme pension (or any pensions from elsewhere) comes into payment it will be assessed against 34.6% of the LTA limit in play at the time and if a breach occurs there will be a tax charge against the annual pension for life.
Wendy Bandeira, Senior Pension Adviser