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HMRC internal manual

Pensions Tax Manual

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

Glossary PTM000001
   

 

Individual with individual protection 2016 (IP 2016) only who has taken benefits between  6 April 2006 and 5 April 2016
Individual with IP 2016 only with a pre-6 April 2006 pension but hasn’t  taken benefits between 6 April 2006 and 5 April 2014
Individual with IP 2016 only who has taken benefits between 6 April 2006 and 5 April 2016 and is receiving a pre-6 April 2006 pension
Individual with fixed protection (FP 2012) and IP 2016 who takes benefits after 6 April 2016 while FP 2012 valid then loses FP 2012 and reverts to IP 2016
Individual with fixed protection 2016 (FP 2016) and IP 2016 who takes benefits after 6 April 2016 while FP 2016 valid then loses FP 2016 and reverts to IP 2016

Individual with individual protection 2016 (IP 2016) only who has taken benefits between  6 April 2006 and 5 April 2016

Andrei applies for IP 2016 and his relevant amount is £1.2 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 £200,000,
  2. On 5 May 2008 he crystallised benefits with a value of £400,000,
  3. On 5 August 2011 he crystallised benefits worth £300,000.

At a time when the standard lifetime allowance is £1 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 LTA charge and if so how much?

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

  1. The 2007 benefits crystallised when the LTA was £1.6m so Andrei used up 12.5 per cent of his lifetime allowance (£200,000/£1.6m x 100).
  2. The 2008 benefits crystallised when the LTA was £1.65m so Andrei used up 24.24 per cent (rounded down to two decimal places) of his lifetime allowance (£400,000/£1.65m x 100).
  3. The 2011 benefits crystallised when the LTA was £1.8m so Andrei used up 16.66 per cent (rounded down to two decimal places) of his lifetime allowance (£300,000/£1.8m x 100).

Andrei has therefore already used up 53.4 per cent of his lifetime allowance so has 46.6 per cent of his £1.2 million protected lifetime allowance available. This amounts to benefits valued at £559,200.

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

Individual with IP 2016 only with a pre-6 April 2006 pension but hasn’t  taken benefits between 6 April 2006 and 5 April 2016

Bella applies for IP 2016 and her relevant amount is £1.4 million meaning she has a protected LTA of £1.25 million. She has not had any other form of protection. Her benefits on 5 April 2016 consist of an occupational pension that came into payment before 6 April 2006 and uncrystallised pension rights. Bella continues to accrue benefits in her current registered pension scheme.

At a time when the standard lifetime allowance is £1 million, Bella crystallises her remaining benefits which are defined benefits. She receives a scheme pension of £15,000 per annum and a lump sum of £100,000. For lifetime allowance purposes Bella has crystallised benefits worth £400,000 (scheme pension £15,000 x 20 + lump sum £100,000). Is she liable to a LTA charge and if so how much?

When Bella 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 (BCE) in relation to this pre-commencement pension immediately before her actual BCEs which crystallises £1.2 million (£48,000 x 25).

Bella therefore has £200,000 of her protected lifetime allowance left after the deemed BCE. She can take 25 per cent of this (£50,000) as a pension commencement lump sum and a scheme pension of £7,500 (£150,000/20).

Bella’s total crystallised benefits are valued at £1.6 million. As Bella’s protected lifetime allowance is £1.4 million, she is liable to a lifetime allowance charge on £200,000. Bella’s £100,000 lump sum is paid 2 weeks after she becomes entitled to her pension so £50,000 is a pension commencement lump sum which, under the tax rules, crystallises before her pension and £50,000 is a lifetime allowance excess lump sum subject to a 55 per cent lifetime allowance charge. Both lump sums are BCEs. That part of Bella’s scheme pension which has a lifetime allowance value of £150,000 uses up her remaining available lifetime allowance. So the lifetime allowance value of the remainder (£7,500 x 20 = £150,000) of Bella’s scheme pension is liable to a 25 per cent lifetime allowance charge.

Bella’s lifetime allowance liability is therefore

£50,000 @ 55% = £27,500

£150,000 @ 25% = £37,500

Total = £65,000.

Individual with IP 2016 only who has taken benefits between 6 April 2006 and 5 April 2016 and is receiving a pre-6 April 2006 pension

Rob applies for IP 2016 and his relevant amount is £1.25 million meaning he has a personalised LTA 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. Rob has not had any other form of protection. He continues to accrue benefits in his current registered pension scheme.

On 1 July 2018 Rob crystallises his remaining benefits which are money purchase benefits and at that time have a value of £500,000. He takes a lump sum of £125,000 and designates £375,000 as available for drawdown pension. Is he liable to a LTA charge and if so how much?

First calculate how much lifetime allowance Rob has already used up. Rob 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 Rob’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). In Rob’s case this uses up 45.71 per cent of his available lifetime allowance (£800,000/1.75 million x 100). Note: A scheme administrator should not include the LTA value of a deemed BCE for a pre-commencement pension in the LTA statement they issue to the member. However, they will normally tell the member the amount of LTA used up by the deemed BCE as a percentage of the LTA.

Rob then crystallised benefits with a LTA 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 Rob’s LTA statement.

Rob has 42.87 per cent of his protected lifetime allowance (£1.25 million) available on 1 July 2018. This amounts to £535,875. Rob is therefore not subject to a lifetime allowance charge as his crystallised benefits are £500,000.

Individual with fixed protection (FP 2012) and IP 2016 who takes benefits after 6 April 2016 while FP 2012 valid then loses FP 2012 and reverts to IP 2016

Grace has already applied for fixed protection 2012 (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 2016 and has a relevant amount of £1.3 million. Her protected lifetime allowance is £1.25 million. Her IP 2016 application is successful but dormant - so long as Grace’s FP 2012 is valid it takes priority over her IP 2016 as it is more advantageous. Grace will not therefore receive her IP 2016 reference number certificate unless she loses FP 2012.

Grace 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 Grace 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 2016-17.

On 31 December 2016, Grace crystallises her money purchase rights. These were valued at £800,000 on 5 April 2016 but due to good investment decisions these have increased to £1.2 million by the time they crystallise. Grace 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 2017 Grace 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.

Grace notifies HMRC that she has lost her FP 2012 and is issued with her IP 2016 reference number as evidence that she now has a protected lifetime allowance of £1.25 million.

Grace crystallises her defined benefits at a time when the standard lifetime allowance is £1 million. She receives a pension of £20,000 and a lump sum of £100,000. For lifetime allowance purposes these are valued at £500,000 (£20,000 x 20 + £100,000).

Grace 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 (£416,750) of her £1.25 million protected lifetime allowance available. Grace has exceeded her available lifetime allowance so has a lifetime allowance charge on the excess (£83,250). As 25 per cent of her available protected lifetime allowance is £104,187.50 her entire lump sum is a pension commencement lump sum and under the tax rules this crystallises before her pension. So the £83,250 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 (£20,812.50).

Individual with fixed protection 2016 (FP 2016) and IP 2016 who takes benefits after 6 April 2016 while FP 2016 valid then loses FP 2016 and reverts to IP 2016

Swinal has already applied for fixed protection 2016 (FP 2016), giving her a protected lifetime allowance of £1.25 million. She has not had any benefit crystallisation events and has benefits in both money purchase and final salary defined benefits arrangements. She then applies for IP 2016 and has a relevant amount of £1.2 million. Her IP 2016 application is successful but dormant - so long as Swinal’s FP 2016 is valid it takes priority over her IP 2016 as it is more advantageous. Swinal will not therefore receive her IP 2016 reference number certificate unless she loses FP 2012.

Swinal has not made any contributions to her money purchase arrangement since 5 April 2016. She has continued in active membership of her defined benefits scheme but, as she has a substantial number of years of pensionable service and her pensionable salary has not been increased since 2014, Swinal’s defined benefits pension rights increase by less than the relevant percentage so she does not have benefit accrual in the tax years 2016-17 and 2017-18.

On 31 December 2017, Swinal crystallises her money purchase rights. These were valued at £500,000 on 5 April 2016 but due to good investment decisions these have increased to £750,000 by the time they crystallise. Swinal has used up 60 per cent of her FP 2016 protected lifetime allowance of £1.25 million. Her scheme administrator gives her a lifetime allowance statement showing this.

On 1 June 2016 Swinal receives a large salary increase from her employer which means she has benefit accrual and her FP 2016 is lost. Her previous BCEs are not revisited.  Swinal notifies HMRC that she has lost her FP 2016 and is issued with her IP 2016 reference number certificate as evidence that she now has a protected lifetime allowance of £1.2 million.

Swinal crystallises her defined benefits at a time when the standard lifetime allowance is £1 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).

Swinal 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 (£480,000) of her £1.2 million protected lifetime allowance available. Swinal has exceeded her available lifetime allowance so has a lifetime allowance charge on the excess (£170,000). As 25 per cent of her available lifetime allowance is £120,000 her maximum lump sum payable as a pension commencement lump sum, which under the tax rules crystallises before her pension, is £120,000.

Swinal’s pension commencement lump sum (£120,000) and £260,000 of her pension have used up all her available lifetime allowance. The lump sum is not paid until after Swinal’s entitlement to her pension has arisen so the £30,000 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 £16,500. The remaining £140,000 excess over Swinal’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 £35,000. Swinal’s total lifetime allowance tax charge is therefore £51,500.