RPSM03102020 - Technical Pages: Protecting pre 6/4/06 pension rights from tax charges: Primary protection: Protection from the lifetime allowance charge
Protection from the lifetime allowance charge
| [Para 7 Sch 36] |
Protection of an individual’s pension rights will be achieved by giving the individual claiming it a higher personal lifetime allowance than the standard lifetime allowance.
This is achieved by applying an additional factor to the current standard lifetime allowance at the date that benefits are taken.
The additional factor is calculated using the formula in paragraph 7(3) of Schedule 36 Finance Act 2004 of (RR - SLA)/SLA
(Where RR = the value of the individual’s pension rights at 5 April 2006 and SLA = £1.5 million).
When benefits come into payment before 6 April 2012
Example 1
Jacob has protected pension rights of £3 million. For the purposes of this example, it has been assumed that Jacob’s rights when valued were within “HMRC limits”. The valuation section of this guidance at RPSM03101510 explains how only rights valued on 5 April 2006 within “HMRC limits” can be taken into primary protection.
Using the formula the additional factor is (£3 million - £1.5 million)/£1.5 million = 1.
In other words, 1 x standard lifetime allowance can be added to the standard lifetime allowance.
Thus, if sayJacob’s benefits come into payment on 31 December 2011, the standard lifetime allowance is £1.8 million, so Jacob will be protected from the lifetime allowance charge on rights valued up to £3.6 million. This is the standard lifetime allowance of £1.8 million at the date that benefits come into payment plus a factor of 1 x standard lifetime allowance [£1.8 million] at that time.
Where benefits will not come into payment until on or after 6 April 2012
| [s218(5B)] |
The standard lifetime allowance for the tax year 2011-12 is £1.8 million. For tax year 2012-13 the standard lifetime allowance is reduced to £1.5 million. It will remain at that level for later tax years unless it is increased by Treasury order.
To maintain the value of the primary protection at 2011-12 levels, the additional factor (calculated as above) is applied to the figure of £1.8 million where this is greater than the current standard lifetime allowance.
Example 2
Jacob has protected pension rights of £3 million. For the purposes of this example, it has been assumed that Jacob’s rights when valued were within “HMRC limits”. The valuation section of this guidance at RPSM03101510 explains how only rights valued on 5 April 2006 within “HMRC limits” can be taken into primary protection.
Using the formula the additional factor is
(£3 million - £1.5 million)/£1.5 million = 1.
In other words, 1 x £1.8 million (or, if greater, the standard lifetime allowance when benefits are taken) can be added to the figure of £1.8 million (or, if greater, the standard lifetime allowance when benefits are taken).
Thus, if say Jacob’s benefits come into payment on 31 December 2016 when the standard lifetime allowance is £1.5 million, Jacob will be protected from the lifetime allowance charge on rights valued up to £3.6 million i.e. £1.8 million plus a factor of 1 x £1.8 million.
However, if, instead, the standard lifetime allowance has increased to, say, £2 million by 31 December 2020, Jacob will be protected from the lifetime allowance charge on rights valued up to £4 million. This is the standard lifetime allowance of £2 million at the date that benefits are taken plus a factor of 1 x standard lifetime allowance [£2 million] at that time.
| Glossary (RPSM20000000) |
