RPSM03106090 - Technical Pages: Protecting pension rights from tax charges: Taking benefits before normal minimum pension age: Example 1 - reduction of lifetime allowance

Example 1 of the effect of the reduction of the lifetime allowance where a member takes benefits before normal minimum pension age

Boris has a protected pension age of 35. In 2006/07, just after his 35^th birthday, Boris takes pension rights with a capital value of £1 million. The normal minimum pension age is 50 and the standard lifetime allowance (which Boris has) is £1.5 million.

Boris’s lifetime allowance is reduced by 35% - this is 2.5% for each of the 14 complete years between the date of taking benefits and the normal minimum pension age. His lifetime allowance for these benefit crystallisation events is £975,000.

This reduced lifetime allowance also affects the amount that he can be paid as a pension commencement lump sum. The maximum lump sum Boris can receive is £243,750 (£975,000/4).

Boris is paid a lump sum of £243,750 with the remaining £756,250 being used to provide a pension. The value of the benefits paid, £1 million, is tested against the amount of his reduced lifetime allowance, £975,000. As the value of benefits taken exceeds the available lifetime allowance, there is a lifetime allowance charge on £25,000.

In March 2012, aged 40, Boris takes benefits valued at £500,000 from another scheme that also has a protected pension age. The standard lifetime allowance is £1.8 million in 2011/12. Boris’s personal lifetime allowance is reduced by 35% for the 14 complete years between taking benefits and the normal minimum pension age of 55. His lifetime allowance at the second benefit crystallisations will be £1,170,000.

The value of Boris’s first benefit crystallisation events exceeded his available lifetime allowance at that time. So the value of the rights previously crystallised is taken to be the amount of his available lifetime allowance at that time, i.e. £975,000 not £1 million. The £975,000 deemed to have been taken at the first benefit payment is now worth £1,170,000 (as increased by £1.8/£1.5 million).

The maximum lump sum Boris can now have is £nil, being (£1,170,000 - £1,170,000)/4.

The value of the two benefit crystallisations (£500,000 + £1,170,000) is tested against the reduced lifetime allowance of £1,170,000. The value of benefits taken (£1,670,000) exceeds the available lifetime allowance (£1,170,000) so there is a lifetime allowance charge on £500,000.