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Lifetime Allowance calculations for different forms of protection

A summary of the Lifetime Allowance calculations which should be used for different forms of protection.

Since pension simplification in April 2006 there have been a string of Lifetime Allowance (LTA) protections which clients could have in different circumstances. The LTA was reduced by legislation in 2012. As a result, LTA calculations must take this reduction into consideration when determining the percentage of the LTA used in different circumstances.

The following notes summarise the calculations which should be used in each benefit crystallisation event (BCE) circumstance. These are not comprehensive calculations and should only be treated as notes and guidelines.

The below calculations are assumed to be taking place after 5 April 2014.

Lifetime Allowance test: Example – No protection

In 2010/11 James decided to draw benefits from a personal pension crystallising £432,000. This used up 24% of the standard lifetime allowance (£432,000/£1,800,000).

In August 2014 James decides to crystallise further pension funds of £900,000. James tells the Scheme Administrator that he has already used up 24% of his lifetime allowance in 2010/11. James’s available lifetime allowance at that point is 76% of the lifetime allowance or £1,250,000 x 76% = £950,000. James has sufficient unused lifetime allowance to crystallise the £900,000 without being subject to a lifetime allowance tax charge.

Read our associated article ‘LTA calculations applicable after 5 April 2014’ which lays out the calculation discussed here in a tabular format.

Lifetime Allowance test: Example – Primary protection

Individuals with pension rights of more than £1.5m as at 5 April 2006 could have applied for Primary Protection. The extent to which the member’s rights, valued on 5 April 2006, exceeded £1.5m is expressed as a Primary Protection factor. An individual with Primary Protection will have their personal lifetime allowance calculated as follows:

£1.8m + (£1.8m x Primary Protection Factor)

The Primary Protection factor is always applied to £1.8m and then added to an underpinned lifetime allowance of £1.8m to get the personal LTA. For example, a Primary Protection factor of 0.2 gives an individual a personal LTA of £1.8 million + (£1.8 million x 0.2) = £2,160,000.

Previous crystallisation events

If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. In order to work out how much lifetime allowance has been used to date you can simply multiply the percentages by £1.5 million. This is because the LTA used in 2006, at the time the protection was granted, was £1.5 million. This has the same effect as applying the calculation of:

the sum crystallised multiplied by (£1.5 million divided by the LTA in the tax year of crystallisation) to effectively devalue the crystallised sum.

For example, Cathy crystallised £700,000 in 2008/09 when the standard lifetime allowance was £1.65m. The Scheme Administrator confirmed to Cathy that this used up 42.42% of the standard lifetime allowance.

Cathy decides to crystallise further pension funds in October 2014. Cathy calculates that she has used up £636,300 (£1.5m x 42.42%) of her lifetime allowance at that point.

Cathy has a Primary Protection factor of 0.2. She calculates that her personal lifetime allowance in October 2014 is £2,160,000 (£1.8m +(£1.8m x 0.2)). Cathy wants to know how much of her personal lifetime allowance she has left. Cathy deducts the amount of lifetime allowance she has used up (£636,300) from her personal lifetime allowance (£2,160,000) to arrive at her unused lifetime allowance of £1,523,700.

Please note that for all crystallisation events that occur after 5 April 2014 the monetary amount will have a calculation of £1.8/£1.8 million applied to it. This will be applied to all events until the LTA increases above £1.8 million at some time in the future.

Read our associated article ‘LTA calculations applicable after 5 April 2014’ which lays out the calculation discussed here in a tabular format.

Lifetime Allowance test: Example – Enhanced LTA factors

An enhanced lifetime allowance can be given as a consequence of receiving a pension credit on divorce, a period of non uk residence or a transfer to a registered pension scheme from some overseas pension schemes. The enhancement lifetime allowance is given by way of a factor. The LTA enhancement factor determines how much extra should be added to the standard lifetime allowance in any tax year when a benefit crystallisation event occurs. An individual’s lifetime allowance is calculated using the following formula:

SLTA + (LTA x enhancement factor)

Where:

SLTA - is the standard LTA applicable at the point of the BCE

LTA – the value of LTA depends on when the enhancement factor is given. If it was before 6 April 2012, LTA is £1.8 million. If it was between 6 April 2012 and 5 April 2014, LTA is £1.5 million and after 5 April 2014 it will be £1.25 million.

For example, an enhancement factor of 0.4 given in August 2012, would give an individual a personal lifetime allowance of £1.25m + (£1.5m x 0.4) = £1,850,000.

Previous crystallisation events

If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. In order to work out how much lifetime allowance has been used to date you can simply multiply the percentages by the current standard lifetime allowance (£1.25m 2014/15).

For example, Tim crystallised £600,000 in 2011/12 when the standard lifetime allowance was £1.65m. The Scheme Administrator confirmed to Tim that this used up 33.33% of the standard lifetime allowance (£600,000/£1,650,000).

Tim decides to crystallise further pension funds in December 2014. Tim calculates that he has used up £416,625 (£1.25m x 33.33%) of his lifetime allowance at that point.

Tim has an enhanced lifetime allowance factor of 0.3 that was given to him in August 2010. Tim calculates that his personal lifetime allowance in December 2014 is:

£1.25m + (£1.8m x 0.3) = £1,790,000

Tim knows that he has £1,373,375 (£1,790,000 - £416,625) unused lifetime allowance at the point he wants to crystallised further pension funds in December 2014.

Read our associated article ‘LTA calculations applicable after 5 April 2014’ which lays out the calculation discussed here in a tabular format.

Lifetime Allowance test: Example – Fixed protection 2012

This gives an individual a personal lifetime allowance of £1.8 million.

Previous crystallisation events

If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. In order to work out how much lifetime allowance has been used to date you can simply multiply the percentages by £1.8m.

For example, Jane is looking to crystallise benefits in August 2014 and has had one other previous benefit crystallisation event, which occurred in May 2009. At that point she crystallised £500,000 representing 28.57% of the then standard lifetime allowance of £1.75m. Jane knows that she has 71.43% of her personal lifetime allowance of £1.8m available in August 2014. This equates to £1,285,740.

Read our associated article ‘LTA calculations applicable after 5 April 2014’ which lays out the calculation discussed here in a tabular format.

Lifetime Allowance test: Example – Fixed protection 2014

This gives an individual a personal lifetime allowance of £1.5 million.

Previous crystallisation events

If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. In order to work out how much lifetime allowance has been used to date you can simply multiply the percentages by £1.5m.

For example, Jonny is looking to crystallise benefits in June 2014 and has had one other previous benefit crystallisation event, which occurred in January 2013. At that point he crystallised £425,000 representing 28.33% of the then standard lifetime allowance of £1.5m. Jonny knows that he has 71.67% of his personal lifetime allowance of £1.5m available in June 2014. This equates to £1,075,050.

Read our associated article ‘LTA calculations applicable after 5 April 2014’ which lays out the calculation discussed here in a tabular format.

Individual protection

Individual Protection will give a personalised lifetime allowance based on the value of pension savings at 5 April 2014, up to a cap of £1.5m. For example, if the value of an individual’s pension rights at 5 April 2014 is £1.4m then their personal lifetime allowance will be £1.4m.

Previous crystallisation events

If an individual has previously taken pension benefits, they will need to track how much lifetime allowance has been used up. The pension Scheme Administrator will provide an individual with a statement showing what percentage of the standard lifetime allowance is used up each time benefits are taken. In order to work out how much lifetime allowance has been used to date you can simply multiply the percentages by the individual protection personalised lifetime allowance.

For example, Paul is looking to crystallise benefits in January 2015 and has had one other previous benefit crystallisation event, which occurred in May 2011. At that point he crystallised £900,000 representing 50% of the then standard lifetime allowance of £1.8m. Paul applied for Individual Protection and the value of his pension rights on the 5 April 2014 was £1,450,000. Paul knows that he has 50% of his personal lifetime allowance of £1,450,000 available in January 2015. This equates to £725,000.

Read our associated article ‘LTA calculations applicable after 5 April 2014’ which lays out the calculation discussed here in a tabular format.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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