LIFETIME ALLOWANCE

Lifetime allowance is the overall limit of tax privilege funds an individual can accrue before a tax (lifetime allowance tax) is applied. This applies to all of the members benefits across all of their UK schemes (excluding state pension). 

For those with large pension plans lifetime allowance is an additional, unwanted tax but with some planning this can often be eradicated.

When assessing the probability of being affected by lifetime allowance we need to take into consideration current age, retirement age, expected growth rates, current contribution amount and current value of pension. In the below example we have assume growth rates of 5%, no further contributions and retirement at age 65. 

• Age 30 | Current Pension Savings £200,000 | Value at age 65 = £1,100,000
• Age 40 | Current Pension Savings £300,000 | Value at age 65 = £1,015,000
• Age50 | Current Pension Savings £500,000 | Value at age 65 = £1,039,000

When will I best tested against the lifetime allowance limit?

Testing of benefits is done at Benefit Crystallisation Events (BCE). The total value plus withdrawals will be taken into consideration .  These events are:

• Taking pensions – the total value of the amounts moved into a drawdown pension. For a final salary scheme it is 20x the first annual pension amount.
• Pension Commencement Lump Sum (PCLS) – client will crystallise the pot up to 4x the amount of PCLS taken.
• Age 75 – any uncrystallised funds are tested against lifetime allowance
• Death – all funds are retested against lifetime allowance. To include withdrawals plus remaining value.
• Transfer to Recognised Overseas Pension (ROPs) - all funds are tested at point of transfer

Members lifetime allowance is cumulative across different events. Example: Member drawdown of a company pensions pot of £500,000 using 47.39% of their lifetime allowance. Member then transfers their private pension worth £750,000 to a ROPs. This event would be 71.09% of a members lifetime allowance but the member only has 52.61% remaining after they designated their £500,000 scheme to drawdown. Therefore the client would have a tax charge for any amount transferred above the lifetime allowance - £195,000.