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Pensions Tax Manual

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Protection from the lifetime allowance charge: Lifetime allowance enhancement factors: examples of applying lifetime allowance enhancement factors

Glossary PTM000001
   

Introduction
Examples

Introduction

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 BCE 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.

The first example is a straightforward one. The remaining examples explain how things work where there is an entitlement to more than one lifetime allowance enhancement factor.

Examples

Example 1 - single lifetime allowance enhancement factor

Lisa transferred £300,000 into a registered pension scheme from a recognised overseas pension scheme in the 2006-07 tax year and is entitled to a lifetime allowance enhancement factor (or recognised overseas scheme transfer factor) of 0.2. This is calculated on the basis of a standard lifetime allowance at that time of £1.5 million.

This fact is notified to HMRC, who provide Lisa with a certificate that confirms this level of entitlement.

Lisa draws benefits under the scheme in 2008-09 (when the standard lifetime allowance is £1.65 million). Lisa’s lifetime allowance at that point is £1.65m + (£1.65m x 0.2), giving Lisa a lifetime allowance of £1.98 million at that time.

Lisa holds benefits under 2 other registered pension schemes. She draws benefits from one of these in the 2010-11 tax year when the standard lifetime allowance is £1.8 million. Lisa’s lifetime allowance at that point is therefore £1.8m + (£1.8m x 0.2), giving Lisa a lifetime allowance of £2.16 million at that time. This figure is used to calculate her available lifetime allowance at that point (taking into account the amounts that Lisa has crystallised previously at earlier BCEs).

Lisa takes benefits from the third scheme in the 2012-13 tax year when the standard lifetime allowance is £1.5 million. Lisa’s lifetime allowance at that point is therefore £1.5m + (£1.8m x 0.2), giving Lisa a lifetime allowance of £1.86 million in that tax year. This figure is used to calculate her available lifetime allowance at that point (taking into account the amounts that Lisa has crystallised previously at earlier BCEs)

Alternatively, Lisa’s lifetime allowance developments may be tracked using percentages:

When Lisa becomes entitled to her lifetime allowance enhancement factor of 0.2 her personal lifetime allowance becomes 120 per cent of the standard lifetime allowance and her available lifetime allowance is the same (because she has been subject to no BCEs).

When Lisa draws benefits under the scheme in 2008-09 she crystallises £165,000, or 10 per cent of the standard lifetime allowance at the time. So Lisa’s available lifetime allowance going forward becomes 110 per cent of the standard lifetime allowance.

When Lisa draws benefits from the second registered pension scheme in 2010-11, she crystallises £540,000, or 30 per cent of the standard lifetime allowance at the time. So Lisa’s available lifetime allowance going forward is 80 per cent of the standard lifetime allowance.

When Lisa draws benefits from the third registered pension scheme in 2012-13, she crystallises £300,000, or 20 per cent of the standard lifetime allowance at the time. As Lisa’s enhancement factor arose before 6 April 2012, as explained above, her personal lifetime allowance is £1.86 million, or 124 per cent of the standard lifetime allowance of £1.5 million.

Lisa has now used up a total of 60 per cent of the standard lifetime allowance, so her available lifetime allowance going forward is 64 per cent of the standard lifetime allowance.

Example 2 - Enhanced lifetime allowance factors (not including primary protection) - pre-6 April 2012

In June 2006, Ian’s scheme receives a transfer worth £750,000 from a recognised overseas pension scheme. The standard lifetime allowance at this point is £1.5 million. None of that transfer relates to an earlier transfer from a UK tax approved scheme, and none of the contributions to that overseas scheme attracted UK tax relief. Ian notifies HMRC of his claim to an entitlement to a lifetime allowance enhancement factor (a recognised overseas scheme transfer factor). The recognised overseas scheme transfer factor is 0.5 (£750,000/£1. 5 million = 0.5).

In May 2008, Ian’s scheme receives another transfer from a recognised overseas pension scheme worth £660,000. The standard lifetime allowance at this point is £1.65 million. None of that transfer relates to an earlier transfer from a UK tax approved scheme, and none of the contributions to that overseas scheme attracted UK tax relief. Again, Ian notifies HMRC of his claim to an entitlement to a lifetime allowance enhancement factor. The recognised overseas scheme transfer factor is 0.4 (£660,000/£1.65 million = 0.4).

In August 2010, Ian decides to draw benefits from the above scheme. His lifetime allowance at that time is £3.42 million arrived at by

  • adding together the enhancement factors (0.5 + 0.4 = 0.9)
  • multiplying the standard lifetime allowance for the 2010-11 tax year by the total of the two factors (£1.8 million x 0.9 = £1.62 million)
  • then adding this figure to the standard lifetime allowance

£1.8million + (£1.8 million x 0.9) = £3.42 million

This figure is used to calculate his available lifetime allowance at that point (taking into account the amounts that Ian has crystallised previously at earlier BCESs).

His lifetime allowance will be exactly the same under any other BCE under any other arrangement held in any other registered pension scheme that occurs in that tax year. In the next tax year Ian’s lifetime allowance will be unchanged as the standard lifetime allowance in 2011-12 is also £1.8 million.

If a BCE were to occur in either tax year 2012-13 or tax year 2013-2014, when the standard lifetime allowance is £1.5 million, as the events providing Ian’s factors arose before 6 April 2012, his lifetime allowance is £3.12 million arrived at by

  • adding together the enhancement factors (0.5 + 0.4 = 0.9)
  • multiplying the figure of £1.8 million by the total of the two factors (£1.8 million x 0.9 = £1.62 million)
  • then adding this figure to the standard lifetime allowance at the time of the BCE.

£1.5 million + (£1.8 million x 0.9) = £3.12 million

For a BCE occurring in tax year 2014-15, when the standard lifetime allowance is £1.25 million, as the events providing Ian’s factors arose before 6 April 2012, his lifetime allowance now is £2.87 million arrived at by

  • adding together the enhancement factors (0.5 + 0.4 = 0.9)
  • multiplying £1.8 million by the total of the two factors (£1.8 million x 0.9 = £1.62 million)
  • then adding this figure to the standard lifetime allowance at the time of the BCE.

£1.25 million + (£1.8 million x 0.9) = £2 87 million

Example 3 - Enhanced lifetime allowance factors (including primary protection) - pre-6 April 2012

On 5 April 2006 Varina had benefits worth £2.25 million under registered pension schemes. Varina applied for primary protection. Her primary protection factor is 0.5, calculated as (£2.25 million - £1.5 million)/£1.5 million.

Varina also has some pension rights under overseas pension schemes. In July 2009 Varina transfers £87,500 from a recognised overseas pension scheme into a UK registered pension scheme. Varina is eligible for another enhanced lifetime allowance factor due to this transfer. Varina receives a lifetime allowance protection certificate showing a factor of 0.05 for this transfer.

Following the transfer the total of Varina’s lifetime allowance factors is 0.55.

Before 6 April 2012 Varina’s personal lifetime allowance is calculated as:

Standard lifetime allowance + (standard lifetime allowance x total of lifetime allowance enhancement factors)

In 2009-10 when the standard lifetime allowance is £1.75 million Varina’s personal lifetime allowance is calculated as:

£1.75 million + (£1.75 million x 0.55) = £2,712,500.

From 6 April 2012 as Varina has primary protection her personal lifetime allowance is calculated as:

£1.8 million + (£1.8 million x total of lifetime allowance enhancement factors)

If at any point the standard lifetime allowance becomes more than £1.8 million then the amount of any higher standard lifetime allowance will replace £1.8 million in the equation.

So from 6 April 2012 Varina’s personal lifetime allowance becomes:

£1.8 million + (£1.8 million x 0.55) = £2,790,000.

In 2012-13 when the standard lifetime allowance is £1.5 million Varina transfers £225,000 from a recognised overseas pension scheme in to a UK registered pension scheme. Varina receives an enhanced lifetime allowance factor of 0.15 for this transfer. At this point Varina’s total lifetime allowance enhancement factors are 0.70. Varina has primary protection and LAEF is treated as a single factor even where it is the aggregate of 2 or more factors. So from 6 April 2012 onwards, her enhanced lifetime allowance is calculated by reference to the rules for the primary protection factor, meaning that her personal lifetime allowance is always calculated as:

£1.8 million + (£1.8 million x 0.70) = £3,060,000.

Example 4 - Enhanced lifetime allowance factors (not including primary protection) - pre and post 6 April 2012

In 2009-10 Mark was divorced. He received a pension credit from his ex-wife. As this pension credit came from benefits in payment that had been tested against the lifetime allowance Mark is entitled to an enhanced lifetime allowance factor. Mark’s pension credit was £350,000 and the standard lifetime allowance at that point was £1.75 million. Mark’s enhanced lifetime allowance factor due to the pension credit is 0.2.

Before 6 April 2012 Mark’s personal lifetime allowance is calculated as:

Standard lifetime allowance + (standard lifetime allowance x total of lifetime allowance enhancement factors).

So for 2009-10 Marks personal lifetime allowance would be:

£1.75 million + (£1.75 million x 0.2) = £2.1 million

From 6 April 2012 Mark’s personal lifetime allowance is calculated as:

Standard lifetime allowance + (£1.8 million x total of lifetime allowance enhancement factors)

This is because Mark has an enhanced lifetime allowance factor for an event that occurred between 6 April 2006 and 5 April 2012. As LAEF is treated as a single factor even where it is the aggregate of 2 or more factors Mark’s enhanced lifetime allowance is calculated by reference to the rules for a pre-6 April 2012 factor.

In 2013-14 Mark transfers in benefits from a recognised overseas pension scheme in to a UK registered pension scheme. This gives Mark another enhanced lifetime allowance factor of 0.3. The total of Mark’s lifetime allowance factors is now 0.5.

As Mark has a lifetime allowance factor for an event that occurred between 6 April 2006 and 5 April 2012 his personal lifetime allowance for a BCE occurring after 5 April 2012 is calculated as:

Standard lifetime allowance at the time of the BCE + (£1.8 million x total of lifetime allowance enhancement factors)

So following the transfer from a recognised overseas pension scheme Mark’s personal lifetime allowance at the time of any BCE is calculated as:

Standard lifetime allowance at time of the BCE + (£1.8 million x 0.5).

Example 5 - Enhanced lifetime allowance factors (not including primary protection) - post 5 April 2012

For the purposes of this example assume for all tax years after 6 April 2014 the standard lifetime allowance is £1.25 million.

In 2013-14 Philip transfers £750,000 into a registered pension scheme from a recognised overseas pension scheme. This gives Philip an enhanced lifetime allowance factor of 0.5.

In 2015-16 Philip transfers £375,000 into his registered pension scheme from a recognised overseas pension scheme. This gives Philip an enhanced lifetime allowance factor of 0.3.

As none of Philip’s lifetime allowance factors relate to a time before 6 April 2012 but one occurred between 6 April 2012 and 5 April 2014, Philip’s personal lifetime allowance is calculated by the formula

Standard lifetime allowance + (the higher of £1.5 million or standard lifetime allowance x total of lifetime allowance enhancement factors).

So if a BCE occurs in tax year 2015-16, Philip’s personal lifetime allowance will be:

£1.25 million + £1.5 million x 0.8 = £2,45million.

Example 6 - pre-commencement pension credit factor and a post 5 April 2012 enhanced lifetime allowance factor

Louise received a pension credit before 6 April 2006 (a pre-commencement pension credit under paragraph 18 of Schedule 36). As Louise’s benefits were not more than £1.5 million on 5 April 2006 she could not apply for primary protection. Instead Louise applied for a lifetime allowance enhancement factor based on her pension credit. Louise applied for and received a lifetime allowance factor of 0.24 which represented the amount of her pension credit.

In July 2013 Louise transfers £30,000 from a recognised overseas pension scheme into a registered pension scheme. This entitled Louise to another lifetime allowance enhancement factor of 0.02. Louise now has total enhanced lifetime allowance factors of 0.26.

As Louise had neither primary protection nor an enhanced lifetime allowance factor for the period 6 April 2006 to 5 April 2012 her personal lifetime allowance is calculated by the formula

Standard lifetime allowance + (standard lifetime allowance x total of lifetime allowance enhancement factors).

So, for example, for a BCE occurring in tax year 2013-14 Louise’s personal lifetime allowance is

£1.5 million + £1.5 million x 0.26 = £1.89 million.