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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Protection from the lifetime allowance charge: individual protections 2014 and 2016: examples of taking benefits with individual protection 2014

Glossary PTM000001
   

Individual with individual protection 2014 (IP 2014) only who has taken benefits between (but not before) 6 April 2006 and 5 April 2014
Individual with IP 2014 only who has not taken benefits between 6 April 2006 and 5 April 2014 but is receiving a pre-6 April 2006 pension
Individual with IP 2014  only who has taken benefits between 6 April 2006 and 5 April 2014 and is receiving a pre-6 April 2006 pension
Individual with fixed protection (FP 2012) and IP 2014 who takes benefits after 6 April 2014 while FP 2012 valid then loses FP 2012 and reverts to IP 2014
Individual with fixed protection 2014 (FP 2014) and IP 2014 who takes benefits after 6 April 2014 while FP 2014 valid then loses FP 2014 and reverts to IP 2014

Individual with individual protection 2014 (IP 2014) only who has taken benefits between (but not before) 6 April 2006 and 5 April 2014

Andrei applies for IP 2014 and his relevant amount is £1.45 million meaning he has a protected lifetime allowance of that amount. Andrei has not had any other form of protection. He continues to accrue benefits in his current registered pension scheme. He has had the following benefit crystallisation events (BCEs) since 6 April 2006:

  1. On 20 June 2007 he crystallised benefits with a value of £300,000,
  2. On 5 May 2008 he crystallised benefits with a value of £500,000,
  3. On 5 August 2011 he crystallised benefits worth £400,000.

At a time when the standard lifetime allowance is £1.25 million, Andrei crystallises his remaining benefits which are money purchase benefits and at that time have a value of £400,000. He takes a tax-free lump sum of £100,000 and designates £300,000 as available for drawdown pension. Is he liable to a lifetime allowance charge and if so how much?

First calculate how much lifetime allowance Andrei has already used up:

  1. The 2007 benefits crystallised when the lifetime allowance was £1.6m so Andrei used up 18.75 per cent of his lifetime allowance (£300,000/£1.6m x 100).
  2. The 2008 benefits crystallised when the lifetime allowance was £1.65m so Andrei used up 30.30 per cent (rounded down to two decimal places) of his lifetime allowance (£500,000/£1.65m x 100).
  3. The 2011 benefits crystallised when the lifetime allowance was £1.8m so Andrei used up 22.22 per cent (rounded down to two decimal places) of his lifetime allowance (£400,000/£1.8m x 100).

Andrei has therefore already used up 71.27 per cent of his lifetime allowance so has 28.73 per cent of his protected lifetime allowance available. This amounts to benefits valued at £416,585.

As Andrei has crystallised benefits worth £400,000 he is not liable for any lifetime allowance charge.

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Individual with IP 2014 only who has not taken benefits between 6 April 2006 and 5 April 2014 but is receiving a pre-6 April 2006 pension

Bridget applies for IP 2014 and her relevant amount is £1.6 million meaning she has a protected lifetime allowance of £1.5 million. She has not had any other form of protection. Her benefits on 5 April 2014 consist of an occupational pension that came into payment before 6 April 2006 and uncrystallised pension rights. Bridget continues to accrue benefits in her current registered pension scheme.

On 21 September 2016, when the standard lifetime allowance is £1.25 million, Bridget crystallises her remaining benefits which are defined benefits. She receives a scheme pension of £20,000 per annum and a pension commencement lump sum (PCLS) of £120,000. For lifetime allowance purposes Bridget has crystallised benefits worth £520,000 (scheme pension £20,000 x 20 + PCLS £120,000). Is she liable to a lifetime allowance charge and if so how much?

When Bridget takes her benefits, the annual rate of her pre-6 April 2006 pension (her pre-commencement pension) is £48,000. Under the tax rules, there is a deemed benefit crystallisation event in relation to this pre-commencement pension on 21 September 2016 which crystallises £1.2 million (£48,000 x 25).

Bridget has £300,000 of her protected lifetime allowance left after the deemed benefit crystallisation event. She can take 25 per cent of this (£75,000) as a PCLS.

Bridget’s total crystallised benefits are valued at £1.72 million. As Bridget’s protected lifetime allowance is £1.5 million, she is liable to a lifetime allowance charge on £220,000. Bridget’s lump sum is paid 2 weeks after she becomes entitled to her pension so £75,000 is a PCLS and £45,000 is a lifetime allowance excess lump sum subject to a 55 per cent lifetime allowance charge. That part of Bridget’s scheme pension which has a lifetime allowance value of £225,000 uses up her remaining available lifetime allowance. Using the 20:1 factor, this amounts to scheme pension of £11,250 per annum. So the lifetime allowance value of the remainder (£8,750 x 20 = £175,000) of Bridget’s scheme pension is liable to a 25 per cent lifetime allowance charge.

Bridget’s lifetime allowance liability is therefore

£45,000 @ 55%   = £24,750

£175,000 @ 25% = £43,750

Total                   = £68,500

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Individual with IP 2014 only who has taken benefits between 6 April 2006 and 5 April 2014 and is receiving a pre-6 April 2006 pension

Chandra applies for IP 2014 and his relevant amount is £1.4 million meaning he has a personalised lifetime allowance of that amount. He has had one benefit crystallisation event since 6 April 2006 and also has an occupational pension that came into payment before 6 April 2006. Chandra has not had any other form of protection. He continues to accrue benefits in his current registered pension scheme.

On 1 July 2016 Chandra crystallises his remaining benefits which are money purchase benefits and at that time have a value of £600,000. He takes a tax-free lump sum of £150,000 and designates £450,000 as available for drawdown pension. Is he liable to a lifetime allowance charge and if so how much?

First calculate how much lifetime allowance Chandra has already used up. Chandra crystallised (took) benefits worth £200,000 on 15 August 2009 when the lifetime allowance was £1.75 million. When he crystallised these benefits the annual rate of Chandra’s pre-6 April 2006 pension (his pre-commencement pension) was £32,000. Under the tax rules, there is a deemed benefit crystallisation event in relation to this pre-commencement pension which crystallises £800,000 (£32,000 x 25). Note: A scheme administrator should not include the lifetime allowance value of a deemed BCE for a pre-commencement pension in the lifetime allowance statement they issue to the member. However, they will normally tell the member the amount of lifetime allowance used up by the deemed BCE as a percentage of the lifetime allowance. In Chandra’s case this is 45.71 per cent (£800,000/1.75 million x 100).

Chandra has crystallised benefits with a lifetime allowance value of £200,000. This used up 11.42 per cent (rounded down to two decimal places) of the standard lifetime allowance at the time (£200,000/£1.75 million x 100) and it is this percentage that will be shown on Chandra’s lifetime allowance statement.

Chandra has 42.87 per cent of his protected lifetime allowance (£1.4 million) available. This amounts to £600,180. Chandra is therefore not subject to a lifetime allowance charge as his crystallised benefits are £600,000.

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Individual with fixed protection (FP 2012) and IP 2014 who takes benefits after 6 April 2014 while FP 2012 valid then loses FP 2012 and reverts to IP 2014

Darlene has already applied for FP 2012, giving her a protected lifetime allowance of £1.8 million. She has not had any benefit crystallisation events and has benefits in both money purchase and final salary defined benefits arrangements. She applies for IP 2014 and has a relevant amount of £1.5 million. Her protected lifetime allowance is £1.5 million.

So long as Darlene’s FP 2012 is valid it takes priority over her IP 2014 as it is more advantageous. Darlene will not therefore receive her IP 2014 certificate unless she loses FP 2012.

Darlene has not made any contributions to her money purchase arrangement since 5 April 2012. She has continued in active membership of her defined benefits scheme but, as Darlene has a substantial number of years of pensionable service and her pensionable salary has not been increased since 2011, her defined benefits pension rights increase by less than the relevant percentage so she does not have benefit accrual in the tax years 2012-2013 to 2015-2016.

On 31 December 2015, Darlene crystallises her money purchase rights. These were valued at £800,000 on 5 April 2014 but due to good investment decisions these have increased to £1.2 million by the time they crystallise. Darlene has used up 66.66 per cent of her FP 2012 protected lifetime allowance of £1.8 million. Her scheme administrator gives her a lifetime allowance statement showing this.

On 1 June 2016 Darlene receives a large salary increase from her employer which means she has benefit accrual and her FP 2012 is lost. Her previous BCEs are not revisited.

Darlene notifies HMRC that she has lost her FP 2012 and is issued with her IP 2014 certificate showing that she now has a protected lifetime allowance of £1.5 million.

Darlene crystallises her defined benefits on 1 June 2017 when the standard lifetime allowance is £1.25 million. She receives a pension of £20,000 and a lump sum of £125,000. For lifetime allowance purposes these are valued at £525,000 (£20,000 x 20 + £125,000).

Darlene shows her scheme administrator the lifetime allowance statement for the previous benefit crystallisation events. So the final salary scheme administrator knows that she has 33.34 per cent (£500,100) of her £1.5 million protected lifetime allowance available. Darlene has exceeded her available lifetime allowance so has a lifetime allowance charge on the excess (£24,900). As 25 per cent of her available protected lifetime allowance is £125,025 her entire lump sum is a pension commencement lump sum and under the tax rules this crystallises before her pension. So the excess is paid in the form of pension benefits and subject to the lifetime allowance charge at the rate of 25 per cent giving a tax charge of (£6,225).

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Individual with fixed protection 2014 (FP 2014) and IP 2014 who takes benefits after 6 April 2014 while FP 2014 valid then loses FP 2014 and reverts to IP 2014

Debbie has already applied for FP 2014, giving her a protected lifetime allowance of £1.5 million. She has not had any benefit crystallisation events and has benefits in both money purchase and final salary defined benefits arrangements. She applies for IP 2014 and has a relevant amount of £1.4 million.

So long as Debbie’s FP 2014 protection is valid it takes priority over her IP 2014 protection as it is more advantageous. Debbie will not therefore receive her IP 2014 certificate unless she loses FP 2014.

Debbie has not made any contributions to her money purchase arrangement since 5 April 2014. She has continued in active membership of her defined benefits scheme but, as Debbie has a substantial number of years of pensionable service and her pensionable salary has not been increased since 2014, her defined benefits pension rights increase by less than the relevant percentage so she does not have benefit accrual in the tax years 2014-15 and 2015-16.

On 31 December 2015, Debbie crystallises her money purchase rights. These were valued at £500,000 on 5 April 2014 but due to good investment decisions these have increased to £900,000 by the time they crystallise. Debbie has used up 60 per cent of her FP 2014 protected lifetime allowance of £1.5 million. Her scheme administrator gives her a lifetime allowance statement showing this.

On 1 June 2016 Debbie receives a large salary increase from her employer which means she has benefit accrual and her FP 2014 is lost. Her previous BCEs are not revisited.

Debbie notifies HMRC that she has lost her FP 2014 and is issued with her IP 2014 certificate showing that she now has a protected lifetime allowance of £1.4 million.

Debbie crystallises her defined benefits on 1 June 2017 when the standard lifetime allowance is £1.25 million. She receives a pension of £25,000 and a lump sum of £150,000. For lifetime allowance purposes these are valued at £650,000 (£25,000 x 20 + £150,000).

Debbie shows her scheme administrator the lifetime allowance statement for the previous benefit crystallisation events. So the final salary scheme administrator knows that she has 40 per cent (£560,000) of her £1.4 million protected lifetime allowance available. Debbie has exceeded her available lifetime allowance so has a lifetime allowance charge on the excess (£90,000). As 25 per cent of her available lifetime allowance is £140,000 her maximum lump sum payable as a pension commencement lump sum, which under the tax rules crystallises before her pension, is £140,000.

Debbie’s pension commencement lump sum (£140,000) and £420,000 of her pension have used up all her available lifetime allowance. The lump sum is not paid until after Debbie’s entitlement to her pension has arisen so the £10,000 that does not qualify as pension commencement lump sum is paid as a lifetime allowance excess lump sum. This is subject to the 55 per cent lifetime allowance charge for lump sums giving a tax charge of £5,500. The remaining £80,000 excess over Debbie’s protected lifetime allowance is paid in the form of pension benefits and subject to the lifetime allowance charge at the rate of 25 per cent giving a tax charge of £20,000. Debbie’s total lifetime allowance tax charge is therefore £25,500.