Protection from the lifetime allowance charge: lifetime allowance enhancement factors: applying lifetime allowance enhancement factors
Section 218(4) to (5BD) Finance Act 2004
Regulations 3 (reportable event 6) and 11 Registered Pension Schemes (Provision of Information) Regulations 2006 - SI 2006/567
The member must inform the scheme administrator before a benefit crystallisation event (BCE) where they intend to rely on an enhanced lifetime allowance at that BCE in order to eliminate or reduce a liability to a lifetime allowance charge. The member should evidence their entitlement to the scheme administrator by quoting the reference number given on the certificate.
The legislation operates in such a way as to give an individual the appropriate enhanced lifetime allowance at the appropriate amount according to the date on which the 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 as a single lifetime allowance enhancement factor at any BCE. This single factor is treated as having arisen when the first event to give rise to the right to an enhanced lifetime allowance happened.
Where an entitlement to an enhanced lifetime allowance is being relied on at a BCE to eliminate all or part of a lifetime allowance charge liability, the scheme administrator must report this fact to HMRC - see PTM161400 for more detail. One of the things the scheme administrator must tell HMRC is the reference number quoted by the member evidencing their entitlement to an enhanced lifetime allowance. This will enable HMRC to undertake compliance checks to ensure the correct position has been stated.
How the lifetime allowance enhancement factors work
Sections 218 and 220 to 226 Finance Act 2004
A lifetime allowance enhancement factor determines how much extra should be added to the standard lifetime allowance at an individual’s BCE in order to obtain that individual’s actual lifetime allowance level. The higher the lifetime allowance level, the lower the proportion of their lifetime allowance a particular BCE will use up. For example if £300,000 crystallises at a BCE, this represents 20 per cent of a standard lifetime allowance of £1.5 million, but only 10 per cent of a £3 million enhanced lifetime allowance.
How the factors are calculated
The lifetime allowance enhancement factors are calculated by comparing:
- the capital value of the individual’s benefits being included in the lifetime allowance enhancement process, with
- the level of the standard lifetime allowance at the time the event giving rise to the factor occurs.
After 5 April 2006 these events will be either:
- the overseas transfer being received into the scheme (see PTM095400 for more detail),
- the pension credit factor being applied, or(see PTM095200 for more detail)
- the member ceasing to accrue benefits under the scheme as a ‘non-resident’ (see PTM095300 for more detail).
The same principle applies where dealing with factors relating to transitional protection issues, i.e. in the calculation of the pre-commencement pension credit factor (see PTM092200 for more detail) and the primary protection factor (see PTM092300 for more detail). But here the comparison is always by reference to the standard lifetime allowance for the 2006-07 tax year (£1.5 million).
The factor calculated for an individual represents the extra amount that will not be liable to the lifetime allowance charge.
So for example if the amount is £750,000 and the standard lifetime allowance is £1.5 million at the time the event giving rise to the factor occurred, the factor is 0.5. This factor remains fixed and is applied at future BCEs to the standard lifetime allowance at that time, or, where the event giving rise to the factor occurred after 5 April 2012, to an uplifted lifetime allowance as explained at PTM095600.
Individuals who have fixed protection, fixed protection 2014, fixed protection 2016, individual protection 2014 or individual protection 2014 have an amended standard lifetime allowance as set out below.
- fixed protection (FP 2012) – £1.8 million
- fixed protection 2014 (FP 2014) - £1.5 million
- fixed protection 2016 (FP 2016) - £1.25 million
- Individual protection 2014 (IP 2014) – relevant amount, see PTM094200 (will be between £1.25 million and £1.5 million)
- Individual protection 2016 (IP 2016) - relevant amount, see PTM094210 (will be between £1 million and £1.25 million)
This amended or substituted standard lifetime allowance will impact how a lifetime allowance factor is calculated for an event that occurs after the member has the relevant protection and whilst they retain that protection.
Paul transferred £300,000 into a registered pension scheme from a recognised overseas pension scheme in the 2006-07 tax year when the standard lifetime allowance was £1.5 million. None of the contributions to that overseas scheme attracted UK tax relief and there was no earlier UK transfer.
This results in an entitlement to a recognised overseas scheme transfer factor of 0.2 (£300,000 divided by £1.5 million).
Paul applies for fixed protection so his standard lifetime allowance becomes £1.8 million. This does not affect his existing lifetime allowance factor as it relates to an event before Paul had fixed protection.
In 2015-16 when the normal standard lifetime allowance is £1.25 million Paul transfers £180,000 into a registered pension scheme from a recognised overseas pension scheme. All these funds were built up over a period when Paul wasn’t a relevant UK individual. The lifetime allowance enhancement factor is
Amount of transfer/ standard lifetime allowance
Paul has valid fixed protection at this point so the lifetime allowance factor in respect of this transfer is calculated as
£180,000/ £1.8 million = 0.1.
How a lifetime allowance factor is applied at a BCE
Sections 218 and 220 to 226 Finance Act 2004
Where an individual becomes entitled to a lifetime allowance enhancement factor, their level of lifetime allowance is enhanced at every BCE that occurs in relation to that individual from that point on. How that enhancement is given depends on a number of factors:
- when the BCE occurred,
- the form of the lifetime allowance factor
- when the event triggering the enhancement factor occurred.
- does the individual have any of the fixed or individual protections.
The rules for calculating an individual’s lifetime allowance can be divided into the following groups:
- BCEs occurring before 6 April 2012 –all factors
- Member only has a pre 6 April 2006 divorce factor
- Other enhancement factors relating to pre 6 April 2012 events
- Other enhancement factors relating to events 6 April 2012 to 5 April 2014; BCE before 6 April 2014
- Other enhancement factors relating to events 6 April 2012 to 5 April 2014; BCE after 5 April 2014
- Other enhancement factors relating to events 6 April 2014 to 5 April 2016; BCE before 6 April 2016
- Other enhancement factors relating to events 6 April 2014 to 5 April 2016; BCE after 5 April 2016
- Member only has enhancement factors relating to post 5 April 2016 events
And these groups in turn are impacted by whether or not an individual has any one or more of the following protections:
- fixed protection (FP 2012)
- fixed protection 2014 (FP 2014)
- fixed protection 2016 (FP 2016)
- individual protection 2014 (IP 2014)
- individual protection 2016 (IP 2016)
Detailed guidance, with examples, on how to apply a lifetime enhancement factor at a BCE is at PTM095600.