Pension Lifetime Allowance Planning
and the need for Specialist Advice

The Lifetime Allowance was originally set at £1.5m in the 2006/7 tax year, with legislation stipulating that the limit would increase to £1.8m in the tax year 2010/11. At this point it would increase by RPI each year. However, due to the changing financial landscape, in 2010 the Government announced that the Lifetime Allowance would be reduced to £1.5m from April 2012, with no inflationary increases. This was reduced again to £1.25m in April 2014 and to £1m in 2016, to be increased by inflation each year (measured by CPI).

In the 2021/22 budget, when setting out post-Covid economic measures, it was confirmed that the Lifetime Allowance would be frozen at the 2020 rate of £1,073,100 until April 2026.

Transitional relief has been provided for those that planned for a higher limit, in the form of Fixed Protection (at the level prior to the reduction, which was available if no further ‘benefit accrual’ took place) or Individual Protection (set at the value of the individual’s entitlement at the given date, with future
accrual permitted).

A lifetime allowance calculation takes place every time a ‘benefit crystallisation event’ occurs. There are thirteen such events, including commencing a Defined Benefit pension, taking tax-free cash from a Defined Contribution pension, buying an annuity, turning 75 or dying with Defined Contribution pensions still in place.

When a crystallisation event occurs, resulting in all or part of the entitlement being above the available Lifetime Allowance, a Lifetime Allowance charge occurs.

• If this occurs due to Defined Contribution entitlements, the Lifetime Allowance charge is applied to the amount in excess of the Lifetime Allowance, at either 55% (if taken as a lump sum) or income tax plus 25% (if taken as an income).
• If the Lifetime Allowance is exceeded by a Defined Benefit pension, the scheme uses a ‘debit factor’ to calculate the amount to deduct from the ongoing pension entitlement.

If the LTA charge is taken as income, resulting in an income tax plus 25% charge, the rate of tax is determined in the tax year the income is received. This results in a total charge of:

• 40% for a basic rate taxpayer,
• 55% for higher rate taxpayer,
• 57.5% for additional rate taxpayer.

It is worth noting that any pension, whether Defined Benefit or Defined Contribution, that is in excess of the Lifetime Allowance does not have a tax- free entitlement.

1. Fully understand your current situation.
– What are your current pension entitlements worth in monetary terms, and what are they worth in Lifetime Allowance terms?

2. Consider how your pension entitlement may change in the future.
– How will your entitlements change if you continue to contribute at current levels, alter regular payment amounts or make lump sum pension contributions?
– What effect would a change in your pensionable salary have?
– Consider how your Defined Benefit entitlements accrue and what revaluation factors are applied until retirement age.
– How are your Defined Contribution pensions invested? What is a reasonable rate of future return? What impact would higher or lower than expected investment returns have? Can you better control investment risks in order to optimise your Lifetime Allowance situation?

3. Attempt to calculate when you may reach and/or exceed your Lifetime Allowance.
– What assumptions should you incorporate?
– How sensitive are the projections to the assumptions used?

4. Consider the actions you can undertake to limit your exposure to a Lifetime Allowance charge.
– Can you apply for Transitional protection, whether Fixed or Individual Protection?
– Can you crystalise your pensions in a certain order to reduce the impact of the Lifetime Allowance charge? For instance, starting a Defined Contribution pension before a Defined Contribution pension, or vice versa?
– How should you draw benefits from your pensions? Draw the tax-free cash in stages? Utilise pension flexibility, or generate additional security?
– Can you better control investment risks, in order to more accurately target future pension values?

5. If you have exceeded your Lifetime Allowance, what options should you consider?
– Drawing benefits from alternative assets, such as ISAs
– Saving into a spouse’s pension, instead of your own
– Commencing a ‘phased’ retirement.
– Utilising early retirement factors to reduce the value of the Benefit Crystallisation Event
– Should you continue making pension payments, particularly if an active member of a company pension scheme?