The vast majority of registered pension scheme members should not be affected by this change. A lifetime allowance of £1.5 million means that only individuals who have:
are likely to have pension savings that will exceed £1.5 million.
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If you are already getting your pension from a registered pension scheme and will not be getting any extra benefits from that or any other registered pension scheme in the future then you will not be affected by the change in the lifetime allowance.
If you are already being paid a pension but are expecting to get further additional benefits you may be affected. However you will only be affected if your total pension benefits are more than £1.5 million.
If you took all your benefits from a registered pension scheme on or before 5 April 2012 then you will not be affected by the reduction in lifetime allowance.
If you take some of your benefits before 6 April 2012 and some after 5 April 2012 then you may be affected when you take the rest of your pension benefits. However you can only be affected if your total benefits are more than £1.5 million.
Thomas is a member of a money purchase scheme. In June 2011 Thomas takes part of his benefits from the scheme worth £1.2 million. In June 2011 the lifetime allowance is £1.8 million so Thomas has used up two thirds of his lifetime allowance.
In February 2013 Thomas takes the rest of his benefits from the scheme. Thomas has already used up two thirds of the lifetime allowance. This means that if his benefits are more than one third of the lifetime allowance Thomas will have to pay the lifetime allowance tax charge. The lifetime allowance in February 2013 is £1.5 million. One third of the lifetime allowance is £500,000.
Thomas takes benefits worth £600,000. This is £100,000 more than his available lifetime allowance. Thomas has no form of protection from the lifetime allowance charge. This means he has to pay the lifetime allowance charge on £100,000.
If you take benefits on or after 6 April 2012 then you will use the standard lifetime allowance of £1.5 million unless you have applied for protection. If your benefits from all your registered pension schemes are less than £1.5 million then this change will not affect the tax that you pay.
The reduction in the lifetime allowance will apply to members of all registered pension schemes. The tax rules apply in the same way to public sector and private sector registered pension schemes.
The lifetime allowance rules will apply to you if, since 6 April 2006:
You will only have to pay the lifetime allowance charge if the total value of your pension saving:
is more than your lifetime allowance.
Your lifetime allowance will be based on the standard lifetime allowance (£1.5 million in 2012-13 tax year) unless you have applied for fixed protection, when it will be based on the underpinned lifetime allowance of £1.8 million.
The lifetime allowance rules only apply to your pension savings in:
The tax rules for UK non-registered pension schemes (for example, employer-financed retirement benefits Schemes (EFRBS)) are not affected by the reduction in the standard lifetime allowance.
The lifetime allowance charge is based on the amount of your pension savings built up over time until you take your benefits. There is no direct link between the amount you earn and the amount of your pension savings.
No - you will have to pay the normal rates of tax for the lifetime allowance charge.
The maximum pension commencement lump sum (PCLS) that you can normally take is 25 per cent of your pension fund subject to an overall limit of 25 per cent of the lifetime allowance. However this overall cap on the PCLS will only affect those who have pension savings of more than the lifetime allowance.
Brenda has benefits in a registered pension scheme of £70,000 at June 2011. She is not a member of any other registered pension scheme. Brenda decides to apply for fixed protection.
Brenda decides to take the maximum tax-free PCLS in June 2013 by which time her fund has grown to £77,500. The maximum PCLS Brenda can take is 25 per cent of her fund of £77,500. So she takes £19,375 as a PCLS and uses the rest of her fund (£58,125) to provide a pension.
Her total benefits for lifetime allowance purposes in June 2013 are £77,500 which is less than her protected lifetime allowance of £1,800,000. This means that there will not be a lifetime allowance charge.
Clearly there would have been no lifetime allowance charge on Brenda even if she had not applied for fixed protection and had relied on the standard lifetime allowance of £1,500,000.
The lifetime allowance test is applied whenever you become entitled to your pension or PCLS. The date that you become entitled to your benefits for tax purposes is often not the day you retire. For example if you have not given the pension scheme all the information it needs to pay your benefits you cannot have become entitled to your pension for tax purposes.
Your pension scheme administrator will be able to tell you the date that you become entitled to your pension. Under the tax rules you become entitled to your PCLS immediately before you become entitled to the connected pension benefit so this date will also be the date on which you become entitled to your PCLS.
Find out more about when you become entitled to benefits
On 1 April 2012, Jacek becomes entitled to a pension of £75,000 and a separate PCLS of £300,000 from his employer's registered pension scheme. Under the tax rules the value of Jacek's pension rights are £75,000 × 20 + £300,000 = £1.8 million.
Jacek is paid his PCLS on 10 April and receives his first pension payment on 30 April. As Jacek's entitlement to both benefits arose on 1 April 2012, his lifetime allowance is £1.8 million so he is not liable for a lifetime allowance charge even though he is not paid any benefits until the tax year 2012-13 when the lifetime allowance is reduced to £1.5 million.
If Jacek's entitlement did not arise until after 5 April 2012 and he does not apply for fixed protection he would be subject to a lifetime allowance charge on the value of his benefits (£300,000) in excess of the £1.5 million standard lifetime allowance.
The lifetime allowance will apply to you in the same way, whether you take your benefits early (early retirement) or at normal retirement age.
You will have to pay the lifetime allowance charge if the value of your pension savings is more than your available lifetime allowance. The rate at which tax is charged will depend on how you take your benefits. Any amount over the lifetime allowance taken as a lump sum is taxed at 55 per cent. Any amount over the lifetime allowance taken as a pension is taxed at 25 per cent.
For example Julia has benefits worth £100,000 that are liable to the lifetime allowance charge. She decides to take £20,000 as a lump sum and use the remainder to buy a pension. The tax due is
£20,000 × 55% = £11,000
£80,000 × 25% = £20,000
£31,000
Read more about the lifetime allowance tax charge
The pensions tax rules set out a number of occasions when you will use up part of your lifetime allowance. These occasions are referred to as benefit crystallisation events or BCEs for short. The payment of a pension to a dependant after your death is not a BCE so does not use up any of your lifetime allowance. Nor will some types of lump sum death benefits.
There are a number of types of lump sum death benefits. Some of these lump sums are BCEs and some are not. The two most common lump sum death benefits are BCEs. These are the lump sum death benefits that will normally be paid if the member dies before taking any pension. They are called the defined benefits lump sum death benefit and the uncrystallised funds lump sum death benefit. The payment of these two types of lump sum is a BCE. These lump sum benefits will be tested against your lifetime allowance and so will be affected by the reduction in the lifetime allowance unless you have fixed protection. However, unless the lump sum is likely to exceed £1.5 million you do not need protection. For example, if your employer pays the normal death in service benefit of 4 × salary you would need to be earning over £375,000 a year to get a lump sum death benefit of over £1.5 million. Where the amount of these two types of lump sum is within your lifetime allowance then it is paid tax-free.
You are not affected. A dependant's pension is not tested against the lifetime allowance.
The reduction in the lifetime allowance will not affect your divorce settlement. However, if the pension sharing order increases your benefits due from all registered pension schemes to above £1.5 million then the amount of tax you pay could be affected.
You will not be affected if you have either enhanced or primary protection. These types of protection will continue to apply.
Read more about primary and enhanced protection
No. Now that the lifetime allowance has gone down to £1.5 million the amount of your protected lump sum will remain the same.
Find out more about existing protections
If you have scheme specific lump sum protection then this is not affected now that the standard lifetime allowance is reduced to £1.5 million.
Find about more about how scheme specific lump sum protection will be affected
Yes. The lifetime allowance applies to you in the same way as to any other registered pension scheme member so unless you have fixed protection the reduced lifetime allowance will apply to you.
In addition, unless you are specifically exempted, the tax rules provide that if you take your benefits before age 55 your lifetime allowance is reduced by 2.5 per cent for each complete year between the date you take your benefits and your 55th birthday. So if, say, you were to take your benefits in 2014 on your 45th birthday (ten years before your 55th birthday) your lifetime allowance is reduced by 25 per cent (2.5% × 10).
If you applied for fixed protection, your lifetime allowance is £1.35 million (£1.8 million × 75%). If you did not apply for the new protection your lifetime allowance is £1.125 million (£1.5 million × 75%).
If you applied for fixed protection then a lifetime allowance of £1.8 million will be used in any lifetime allowance enhancement calculations instead of the standard lifetime allowance amount of £1.5 million.
The trivial commutation limit after the changes is £18,000. So, if you have no other benefits in registered pension schemes you should be able to trivially commute your pension fund providing all the other conditions are met.
Read more about trivial commutation
No - the amount that can be paid as a one off lump sum payment on a scheme winding up will remain at £18,000 even after the reduction in lifetime allowance so you did not need to apply for protection.
