RPSM11101090 - Technical Pages: Lifetime allowance: Level of lifetime allowance: How the enhancement factors work

How the lifetime allowance enhancement factors work

A lifetime allowance enhancement factor determines how much extra should be added to the standard lifetime allowance at a BCE (or, in the case of primary protection, the amount of £1.8 million if this is higher than the standard lifetime allowance and the BCE occurred on or after 6 April 2012) in order to obtain that individual’s actual lifetime allowance level. The higher the lifetime allowance level, the lower the proportion of their lifetime allowance a particular BCE will use up. For example if £300,000 crystallises at a BCE, this represents 20% of a standard lifetime allowance of £1.5 million, but only 10% of a £3 million enhanced lifetime allowance.

How the factors are calculated

The lifetime allowance enhancement factors are calculated by comparing

• the capital value of benefits that we want to give credit for in the lifetime allowance enhancement process, with
• the level of the standard lifetime allowance at the time the event giving rise to the factor occurs.

After 5 April 2006 these events will be either

• the point the overseas transfer was received into the scheme,
• the point the pension credit was applied, or
• the point the member ceased to accrue benefits under the scheme as a ‘non-resident’.

The same logic applies where dealing with factors relating to transitional protection issues, i.e. in the calculation of the pre-commencement pension credit factor and the primary protection factor. But here the measure is always by reference to the standard lifetime allowance for the 2006/07 tax year (£1.5 million).

The factor calculated represents the extra amount that should be exempt from the lifetime allowance charge expressed as a fraction of whatever the standard lifetime allowance figure is at the time the factor arose.

So if the amount is £750,000 and the standard lifetime allowance is £1.5 million the factor is 0.5. This factor then remains fixed and is then applied at future BCEs by reference to the standard lifetime allowance at that time. Effectively, the individual has a lifetime allowance of 150% of the standard lifetime allowance at all future BCEs.

Example

Paul transferred £300,000 into a registered pension scheme from a recognised overseas pension scheme in the 2006/07 tax year when the standard lifetime allowance was £1.5 million. None of the contributions to that overseas scheme attracted UK tax relief and there was no earlier UK transfer.

This results in an entitlement to a recognised overseas scheme transfer factor of 0.2 (£300,000 divided by £1.5 million).

If Paul made the transfer in the 2008/09 tax year when the standard lifetime allowance was £1.65 million, this results in a factor (rounded up) of 0.19 (£300,000 divided by £1.65 million).

If Paul had made the transfer in the 2012/13 tax year when the standard lifetime allowance was reduced to £1.5 million, the factor will again be 0.2.