RPSM11101120 - Technical Pages: Lifetime allowance: Level of lifetime allowance: Where more than one lifetime allowance enhancement factor applies

[s218(4)]

The legislation operates in such a way as to give an individual the appropriate enhanced lifetime allowance, at the appropriate amount, as applied at the time the BCE takes place.

In most cases where a member is entitled to an enhancement factor they are likely to be entitled to just one factor. If they are entitled to more than one enhancement factor all the relevant factors are aggregated and applied at any BCE.

Example 1 - Enhanced lifetime allowance factors (not including primary protection) - pre-6 April 2012

In June 2006, Ian’s scheme receives a transfer worth £750,000 from a recognised overseas pension scheme. The standard lifetime allowance at this point is £1.5 million. None of that transfer relates to an earlier transfer from a UK tax approved scheme, and none of the contributions to that overseas scheme attracted UK tax relief. Ian notifies HMRC of his claim to an entitlement to a lifetime allowance enhancement factor (a recognised overseas scheme transfer factor). The recognised overseas scheme transfer factor is 0.5 (£750,000/£1. 5 million = 0.5).

In May 2008, Ian’s scheme receives another transfer from a recognised overseas pension scheme worth £660,000. The standard lifetime allowance at this point is £1.65 million. None of that transfer relates to an earlier transfer from a UK tax approved scheme, and none of the contributions to that overseas scheme attracted UK tax relief. Again, Ian notifies HMRC of his claim to an entitlement to a lifetime allowance enhancement factor . The recognised overseas scheme transfer factor is 0.4 (£660,000/£1.65 million = 0.4).

In August 2010, Ian decides to draw benefits from the above scheme. His lifetime allowance at that time is £3.42 million arrived at by

1. Adding together the enhancement factors (0.5 + 0.4 = 0.9)
2. Multiplying the standard lifetime allowance for the 2010/11 tax year by the total of the two factors (£1.8 million x 0.9 = £1.62 million)
3. Then adding this figure to the standard lifetime allowance

This figure is used to calculate his available lifetime allowance at that point (taking into account the amounts that Ian has crystallised previously at earlier BCEs).

His lifetime allowance will be exactly the same under any other BCE under any other arrangement held in any other registered pension scheme that occurs in that tax year. In the next tax year Ian’s lifetime allowance will be unchanged as the standard lifetime allowance in 2011/12 is also £1.8 million.

For tax years 2012/13 onwards when the standard lifetime allowance is £1.5 million, Ian’s lifetime allowance is £3.12 million arrived at by

4. Adding together the enhancement factors (0.5 + 0.4 = 0.9)
5. Multiplying the standard lifetime allowance for the 2012/13 tax year by the total of the two factors (£1.8 million x 0.9 = £1.62 million)
6. Then adding this figure to the standard lifetime allowance

Example 2 - Enhanced lifetime allowance factors (including primary protection) - pre-6 April 2012

On 5 April 2006 Varina had benefits worth £2.25 million under registered pension schemes. Varina applied for primary protection. Her primary protection factor is 0.5, calculated as (£2.25 million - £1.5 million)/£1.5 million.

Varina also has some pension rights under overseas pension schemes. In July 2009 Varina transfers £87,500 from a recognised overseas pension scheme into a UK registered pension scheme. Varina is eligible for another enhanced lifetime allowance factor due to this transfer. Varina receives a lifetime allowance protection certificate showing a factor of 0.05 for this transfer.

Following the transfer the total of Varina’s lifetime allowance factors is 0.55.

Before 6 April 2012 Varina’s personal lifetime allowance is calculated as

Standard lifetime allowance + (standard lifetime allowance x total of lifetime allowance enhancement factors)

In 2009-10 when the standard lifetime allowance is £1.75 million Varina’s personal lifetime allowance is calculated as

From 6 April 2012 as Varina has primary protection her personal lifetime allowance is calculated as

If at any point the standard lifetime allowance becomes more than £1.8 million then the amount of any higher standard lifetime allowance will replace £1.8 million in the equation.

So from 6 April 2012 Varina’s personal lifetime allowance becomes

In 2012-13 when the standard lifetime allowance is £1.5 million Varina transfers £225,000 from a recognised overseas pension scheme in to a UK registered pension scheme. Varina receives an enhanced lifetime allowance factor of 0.15 for this transfer. At this point Varina’s total lifetime allowance enhancement factors are 0.70. Because Varina has primary protection her personal lifetime allowance is calculated as

Example 3 - Enhanced lifetime allowance factors (not including primary protection) - pre and post 6 April 2012

In 2009-10 Mark was divorced. He received a pension credit from his ex-wife. As this pension credit came from benefits in payment that had been tested against the lifetime allowance Mark is entitled to an enhanced lifetime allowance factor. Mark’s pension credit was £350,000 and the standard lifetime allowance at that point was £1.75 million. Mark’s enhanced lifetime allowance factor due to the pension credit is 0.2.

Before 6 April 2012 Mark’s personal lifetime allowance is calculated as

Standard lifetime allowance + (standard lifetime allowance x total of lifetime allowance enhancement factors).

So for 2009-10 Marks personal lifetime allowance would be

From 6 April 2012 Mark’s personal lifetime allowance is calculated as

This is because Mark has an enhanced lifetime allowance factor for an event that occurred between 6 April 2006 and 5 April 2012.

In 2013-14 Mark transfers in benefits from a recognised overseas pension scheme in to a UK registered pension scheme. This gives Mark another enhanced lifetime allowance factor of 0.3. The total of Mark’s lifetime allowance factors is now 0.5.

As Mark has a lifetime allowance factor for an event that occurred between 6 April 2006 and 5 April 2012 his personal lifetime allowance is calculated as

Standard lifetime allowance + (£1.8 million x total of lifetime allowance enhancement factors)

So following the transfer from a recognised overseas pension scheme Mark’s personal lifetime allowance is calculated as

Example 4 - Enhanced lifetime allowance factors (not including primary protection) - post 5 April 2012

For the purposes of this example assume for all tax years the standard lifetime allowance is £1.5 million.

In 2013-14 Philip transfers £750,000 into a registered pension scheme from a recognised overseas pension scheme. This gives Philip an enhanced lifetime allowance factor of 0.5.

In 2015-16 Philip transfers £375,000 into his registered pension scheme from a recognised overseas pension scheme. This gives Philip an enhanced lifetime allowance factor of 0.25.

As none of Philip’s lifetime allowance factors relate to a time before 6 April 2012 Philip’s personal lifetime allowance is calculated by the formula

Standard lifetime allowance + (standard lifetime allowance x total of lifetime allowance enhancement factors).

So in 2015-16 Philip’s personal lifetime allowance will be

Example 5 - Enhanced lifetime allowance pre A-Day pension credit and post 5 April 2012 factors

Louise received a pension credit before 6 April 2006 (a pre commencement pension credit under paragraph 18 of Schedule 36). As Louise’s benefits were not more than £1.5 million on 5 April 2006 she could not apply for primary protection. Instead Louise applied for a lifetime allowance LTA enhancement factor based on her pension credit. Louise applied for and received a lifetime allowance factor of 0.24 which represented the amount of her pension credit.

In July 2013 Louise transfers £30,000 from a recognised overseas pension scheme into a registered pension scheme. This entitled Louise to another lifetime allowance enhancement factor of 0.02.

Louise now has total enhanced lifetime allowance factors of 0.26.

As Louise had neither primary protection or an enhanced lifetime allowance LTA factor for the period 6 April 2006 to 5 April 2012 her personal lifetime allowance LTA is calculated by the formula

Standard lifetime allowance + (standard lifetime allowance x total of lifetime allowance enhancement factors).

So in 2015-16 Louise’s personal lifetime allowance will be

Note: If the individual has fixed protection (which applies from 6 April 2012), then for the purposes of the tax rules, the standard lifetime allowance applying to that individual is the greater of £1.8 million or the actual standard lifetime allowance at the time of the BCE (see RPSM11101500 onwards). So if the individual had fixed protection in examples 2 to 4, until the standard lifetime allowance exceeds £1.8 million their personal lifetime allowance is calculated as follows

£1.8 million + £1.8 million x total of LTA enhancement factors.

Glossary (RPSM20000000)