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20 min read 5 Apr 22
Answers to questions on the lifetime allowance, including queries about protection, LTA excesses, pre A-day benefits, LTA on death and other general questions.
Q. My client crystallised benefits of £1m when the Standard LTA was £1m. Now that the Standard LTA increases by CPI can they crystallise further benefits without incurring a LTA excess?
A. If your client crystallised £1m of benefits when the Standard LTA was £1m this will have used up 100% of their LTA. Therefore, as they have no LTA remaining they will not benefit from the CPI increase and any further benefits they crystallise will be subject to a LTA excess tax charge.
Q. My client has Fixed Protection/Individual Protection, will their protected LTA amount increase by CPI from 2018 onwards?
A. No, the increase by CPI from 6 April 2018 onwards only applies to the Standard LTA. Where someone holds these forms of protection, their protected LTA amount will not increase, however, if at any point the Standard LTA increases to an amount that is greater than an individual’s protected amount they will then revert to the higher standard LTA amount. For example, someone who has IP16 and a protected LTA of £1,025,000 reverted to the standard LTA when this increased to £1,030,000 from 6 April 2018.
It's important to remember that the LTA increased by CPI up to the 2020/21 tax year, from the 2021/22 to 2025/26 tax years the chancellor has frozen the increases.
Q. My client has 10% of the Standard LTA remaining and now wants to transfer their personal pension pot worth 20% of the LTA to drawdown, can they get their full (25% of the pension pot) tax free cash entitlement?
A. No, they are only entitled to tax free cash on benefits crystallised up to their available LTA, which is 10%, so can get TFC of 25% from half of the amount they are designating to drawdown. The other half of the pot will be a LTA excess and as they are designating to drawdown this will be subject to a 25% charge. Alternatively, scheme rules permitting, they could choose to take the excess as a lump sum instead which would be subject to a 55% tax charge.
It's important to remember that the LTA increased by CPI up to the 2020/21 tax year, from the 2021/22 to 2025/26 tax years the chancellor has frozen the increases.
Q. How are pre A-day pensions in payment tested for LTA purposes?
A. Pensions that were put into payment prior to 6 April 2006 (also known as pre-commencement pensions) are treated as having crystallised immediately prior to the client’s first post A-day BCE and effectively reduce the amount of LTA available. The value used depends on what type of pension the pre A-day pension is:
So, if a client with no LTA protection and a pre A-day capped drawdown plan with a capped drawdown limit of £15,000 had a BCE on 1 May 2017, the pre A-day drawdown would use up:
80% x 25 x £15,000 = £300,000/£1,000,000 = 30% of their LTA meaning they had £700,000 available for the post A-day BCE.
Where the pre A-day benefits use up more than the client’s LTA no charge arises on the excess for the pre A-day benefits, however the full amount crystallising at the post A-day BCE will be a LTA excess, e.g:
Client has no LTA protection and a pre A-day scheme pension in payment of £75,000 on 1 June 2017 when they decide to crystallise further benefits of £150,000. The pre A-day pension uses up 25 x £75,000 = £1,875,000 so the client has no LTA remaining, can take no further TFC and the full £150,000 is a LTA excess. However there is no charge on the £875,000 that was over the available LTA when the pre A-day benefits were tested.
Q. My client has no LTA protection and is about to do a transfer from a defined benefit scheme, which is valued at £400,000 above the LTA, to a money purchase arrangement. Will the LTA excess tax charge be deducted when the fund is transferred?
A. Not unless the funds are being immediately crystallised. If the client is transferring the funds and leaving them uncrystallised this is not a BCE and there is no test against the client’s LTA and therefore no LTA excess will occur.
If the funds are being fully crystallised the client can take benefits up to their available LTA taking 25% as a PCLS and designating the remainder to drawdown. The additional £400,000 will be a LTA excess and can either be taken as a LTA excess lump sum (subject to the scheme allowing a lifetime allowance excess lump payment), after a 55% tax charge has been deducted, or used to provide income from drawdown or an annuity, after a 25% tax charge has been deducted. In either case the scheme administrator will deduct the tax charge up front and account for this to HMRC on the client’s behalf.
Q. My client is about to take benefits from his defined benefit scheme. How will commuting some of his pension for a PCLS impact the LTA used?
A. This depends on the commutation factor used by the scheme and can mean less LTA is used where a PCLS is taken (up to the maximum allowed by legislation), e.g. Client has been offered a pension of £18,644 or a reduced pension of £13,293.84 with a PCLS of £64,201.92 based on the scheme’s commutation factor of 12:1. They have no LTA protection.
Taking the full pension option would use up:
20 x £18,644 = £372,880 (this is divided by the LTA applicable multiplied by 100 to work out the percentage of LTA used (rounded down to 2 decimal places)).
Taking the PCLS and reduced pension would use up:
20 x £13,293.84 + £64,201.92 = £330,078.72 (again, divided by the LTA applicable multiplied by 100 to work out the percentage of LTA used).
As can be seen using the assumptions made in this example (for a scheme whose rules don’t offer the maximum PCLS allowed under legislation), taking the PCLS and reduced pension uses less lifetime allowance than taking the full pension option. However, this is not the case in all circumstances, if the schemes commutation factor is higher than 20 more LTA will be used. If the commutation factor is 20 then the same amount of LTA will be used.
Q. My client has benefits in a defined benefit scheme and is being offered a CETV of £1.3million. They have accrued benefits in the scheme after 5 April 2016 and as at 5 April 2016 their pension benefits were valued at 20 x the pension available at that time which was £45,000 = £900,000. What options do they have as far as LTA protection is concerned?
A. The only two forms of LTA protection currently available are Fixed and Individual Protection 2016. However, as your client has had benefit accrual after 5 April 2016 they are not eligible for FP16 and as the value of their benefits didn’t exceed £1million on 5 April 2016 they are not eligible for IP16.
Q. How is a dependant’s scheme pension treated for LTA purposes?
A. An arising entitlement to a dependant’s scheme pension is not a benefit crystallisation event and is therefore not tested against the deceased member or the dependant’s lifetime allowance. A dependant’s scheme pension is also always subject to income tax regardless of whether the member dies before or after age 75.
Q. My client has Fixed Protection 2014 and is considering transferring benefits from a defined benefit scheme to a money purchase arrangement, will this result in the loss of FP14?
A. As long as the transfer is a ‘permitted transfer’ this will not cause FP14 to be lost. For the transfer to be classed as a permitted transfer, the value of the sums and assets received by the money purchase arrangement must be actuarially equivalent to the rights being transferred. Therefore provided the scheme is not offering an enhanced transfer value, i.e. an additional incentive on top of the normal transfer value calculated by the scheme actuary FP14 will not be lost.
Q. What protections are currently available, what are the eligibility criteria and is there a deadline for applications?
A. The LTA protections which are currently available and some of the eligibility criteria are as follows:
Individual protection 2016– a client needs to have benefits valued in excess of £1m on 5/4/16 to apply and there is currently no end date for applications. The value of any defined benefits are calculated as 20 times the annual pension they would have been entitled to on 5/4/16, assuming entitlement arose on that date, plus any TFC payable other than by commutation. The value of any money purchase benefits is simply the value on 5/4/16. You also need to take into account any previous BCEs and any pre A-day benefits as detailed in our article here:
If the client is eligible they get a protected LTA equal to the lower of the value of their benefits on 5/4/16 or £1.25m.
Fixed protection 2016 – to be eligible the client needs to have made no contributions or had any relevant benefit accrual after 05/04/16. Applications can be made irrespective of the current value of a client’s benefits and there is currently no deadline. If eligible the client gets a protected LTA of £1.25m. Further information, including what is classed as benefit accrual, can be found in our article here:
There is no deadline for submitting applications for either Fixed Protection 2016 or Individual Protection 2016. However, the statutory obligation on scheme administrators to provide values at 5 April 2016 (relevant for IP16) only applied for 4 years. Therefore the scheme may no longer have these records.
Q. Can I use the Cash Equivalent Transfer Value (CETV) for a defined benefit (DB) scheme when calculating the total pension savings for the purpose of an Individual Protection 2016 (IP16) application?
A. For pensions that have not been taken you need to use the value of the pension as at the “relevant date” which is 5 April 2016 for IP16. If the client was still a member of the DB pension scheme on the relevant date then a CETV is not relevant. You can only use a transfer value figure if the transfer from Defined Benefits to Defined Contributions actually took place by the ‘relevant date’.
To calculate the value of the DB pension for IP purposes you will need to ask the scheme to confirm the amount of annual pension that would have been payable assuming entitlement to it arose on the relevant date (so assuming the member could take the pension built up with no penalties on 05/04/16) and whether or not the member had entitlement to a separate lump sum i.e. not by commutation. The value for IP purposes is then calculated by multiplying the pension payable at the relevant date by 20 plus any separate lump sum payable.
For example, if the pension payable at the relevant date is £30,000 but no separate lump sum rights, the value for IP purposes would be £600,000 (20 x £30,000).
The Government provide guidance for how to calculate the value of the client’s pension savings for the purpose of Individual Protection.
Q. How would you value commercial property in an uncrystallised Self-Invested Personal Pension (SIPP) for the purpose of an Individual Protection 2016 (IP16) application?
A. An application for IP16 requires a value of the pension fund as at 5 April 2016. The SIPP provider needs to be asked how to obtain the relevant figure.
Q. I want to transfer from a defined benefit scheme to a defined contribution scheme and apply for Fixed Protection 2016. Does it matter which order I do this in, i.e. transfer first then apply for protection or vice versa?
A. The order is irrelevant. A successful application for Fixed Protection 2016 will be backdated to be valid from 6 April 2016. Any transfer that takes place on or after 6 April 2016 (regardless of whether a client has already applied or is still to apply for FP2016) must be a ‘permitted transfer’, or else FP2016 will be lost.
Q. My client has fixed protection 2016 and is looking to transfer their defined benefits valued at £1.6m to a money purchase arrangement. If they crystallise this can they get TFC on the full fund?
A. No, the maximum TFC a client can take is up to 25% of their available LTA. So, in this case 25% of £1.25m = £312,500. Therefore, if the client wants to fully crystallise they can take up to £1.25m (made up of £312,500 TFC and a residual drawdown fund of £937,500) which will use up 100% of their LTA. The remaining £350,000 is a LTA excess, and they have the following options:
Note – You should also bear in mind that the client will lose their FP16 if the transfer from the DB scheme is not a ‘permitted transfer’. The transfer will be classed as a permitted transfer providing, the value of the sums and assets received by the money purchase arrangement are actuarially equivalent to the rights being transferred, i.e. the scheme is not offering an enhanced transfer value which is higher than the value calculated by the scheme actuary.
Q. My client is eligible for both fixed and individual protection 2016. Can they apply for both and is there any benefit in doing so?
A. Yes, they can apply for both and if they are eligible there is no harm in doing so. FP16 will take precedence and they then have IP16 to fall back on should they break any of the conditions which mean they lose their FP16.
Q. My client has just applied for FP/IP16 now but they have already had a BCE after April 2016, how will this be treated?
A. There have been various discussions around this subject and a number of providers had asked HMRC to provide guidance and clarity on this scenario. HMRC published an update in PSN82 (item 7) to help clarify this.
Our interpretation is FP16 and IP16 are effective from 6 April 2016, regardless of when they are actually applied for, and any BCE that has taken place after 6 April 2016 needs to be reworked based on the client’s protected LTA amount.
Q. My client has IP16 and a protected LTA of £1,163,000. On 6 June 2016 they took benefits from a defined benefit scheme in the form of a scheme pension of £6,650 and no TFC. If they take no further benefits until age 75 and assuming the standard LTA has increased to £1,222,000 by this time, how much TFC can they take? Do they still have 25% of their protected LTA of £1,163,000 or 25% of £1,222,000?
A. They can take up to 25% of their available LTA. Taking the scheme pension used up 20 x 6650/1,163,000 = 11.43%, which means they have 88.57% left. Therefore, assuming the standard LTA is £1,222,000 which is higher than the client’s protected amount this would mean they had 88.57% of £1,222,000 = £1,082,325.40 and can take 25% of this = £270,581.35 (not 25% of £1,222,000 even though they took no TFC when they took their scheme pension as this still used up some of their LTA.)
Q. My client has no Lifetime Allowance (LTA) available. Can they take the excess funds above the LTA as a lump sum from their uncrystallised arrangement or drawdown arrangement?
A. This is possible from uncrystallised funds. This type of lump sum is called is called a Lifetime Allowance Excess Lump Sum. It can be paid as long as the member is under age 75 and the scheme allow it (NB a scheme is not obliged to pay a Lifetime Allowance Excess Lump Sum where their scheme rules do not allow this).
It is not possible to pay a Lifetime Allowance Excess Lump Sum if the member is 75 or above, nor can it be paid from a drawdown arrangement. The member can only draw income from their drawdown arrangement and the income taken will be taxed at their marginal rate.
A Lifetime Allowance Excess Lump Sum is a Benefit Crystallisation Event (BCE6) and this type of lump sum is subject to a 55% LTA tax charge on the LTA excess which the scheme will deduct before paying the lump sum (except where legislation does not permit this, eg from GMP funds).
For example, if the member has no LTA available, an uncrystallised money purchase pot of £100,000, and requests this to be paid as a Lifetime Allowance Excess Lump Sum, the scheme will deduct an LTA charge of 55% (i.e. £55,000) and pay the remaining £45,000 to the member. The Pensions Tax Manual provides full details of the conditions for a Lifetime Allowance Excess Lump Sum, as well as an example of how this can be paid in relation to a Defined Benefit scheme.
Q. Where a client’s pension is shared with their ex-spouse as a result of a pension sharing order is the pension debit amount tested against the original member’s lifetime allowance?
A. Where a pension debit is paid from funds put into payment after A-day, these will have used up some of the original member's lifetime allowance. The amount of LTA used is NOT reduced as a result of the pension sharing. If paid from uncrystallised funds, then providing the transfer is not paid to a Qualifying Recognised Overseas Pension Scheme (QROPS) (which would be a BCE 8), the pension debit amount is not tested against the original member’s LTA.
Q. Is a pension credit tested against the receiving member’s lifetime allowance?
A. Yes, a pension credit is always received as uncrystallised funds and will be tested against the receiving member's lifetime allowance when put in to payment. There are circumstances where the receiving member may qualify for a pension credit factor (effectively increasing their lifetime allowance) and you can read about these at PTM095200. Even though the funds are always received as uncrystallised no PCLS is payable if the pension credit is paid from previously crystallised funds (referred to as a disqualifying pension credit).
Q. How is a pension debit/credit tested for LTA purposes when the original member is over age 75 when the pension is shared?
Where the pension debit is paid after the original member has reached age 75 this will have been tested against their LTA at age 75 (even if the funds remain unused). If the receiving member is under age 75 the funds will be tested again when they put them into payment, reach age 75 or die before 75. However, if the receiving member is over age 75 there will be no further LTA test. (It should also be noted that this is not a disqualifying pension credit even though there has been a BCE, and the receiving member is entitled to a PCLS providing they had sufficient remaining lifetime allowance at age 75 to allow it).
Q. If the original pension scheme member holds lifetime allowance protection, is this impacted by a pension debit?
A. It depends on the type of lifetime allowance protection held. Primary, Individual 2014 and Individual 2016 must be recalculated after a pension debit is paid, and may be lost. Enhanced and all Fixed Protections (2012, 2014 and 2016) are unaffected by a pension debit.
Q. If the member receiving a pension credit holds lifetime allowance protection, is there any impact?
A. It depends on the type of lifetime allowance protection held. Primary, Individual 2014 and Individual 2016 are unaffected. Any Pension Credit factor is also unaffected. Enhanced and all Fixed Protections (2012, 2014 and 2016) will be lost if the Pension Credit is set up in a new arrangement. This is covered at PTM093800 under the heading "Payment of a pension credit under a pension sharing order into a money purchase arrangement (personal pension scheme)”.
Q. If the member receiving a pension credit will now face a lifetime allowance issue, what are their options?
A. They need to check to see if they are eligible to apply for any of the available lifetime allowance protection options. Further details of which can be found in our articles:
Q. The pension debit member holds valid enhanced protection. The pension credit receiving member will now face a lifetime allowance issue. Can they adopt the original member's enhanced protection?
A. No. Lifetime Allowance protection only relates to the client who applied and is not transferrable.
Q. My client has uncrystallised money purchase funds valued at £300,000 above the LTA and no LTA protection, what would the LTA excess tax charge be if they die before age 75?
A. Where an individual dies before age 75 with uncrystallised money purchase funds, and provided the death benefits are distributed within the 2 year window, the full fund will be tested against the deceased member’s LTA. How this would be taxed depends on how the beneficiaries choose to have the benefits paid. Any benefits taken as dependant’s or nominee’s drawdown would be taxed at 25% and any benefits taken as a lump sum would have a 55% tax charge applied to the LTA excess.
Taking an example where the benefits were split equally between 3 different beneficiaries who took their benefits as follows:
Beneficiary A – all as a lump sum
Beneficiary B – all as dependant’s drawdown
Beneficiary C – £50,000 lump sum and £50,000 nominee’s drawdown
HMRC guidance states that the BCEs are all treated as having occurred simultaneously to ensure that the LTA excess charge liability is distributed fairly across all the beneficiaries, so the excess and associated tax charge would be allocated along these lines:
Beneficiary A is liable for one third of the £300,000, taxed at 55% = £55,000
Beneficiary B is liable for one third of the £300,000, taxed at 25% = £25,000
Beneficiary C is liable for one third of the £300,000, half of which is taxed at 55% and the other half is taxed at 25% = £40,000
Q. Where a LTA excess tax charge applies on death before age 75 does the scheme administrator deduct this before distributing the death benefits?
A.No, unlike where a LTA excess occurs during the member’s lifetime, on death the liability for the tax charge lies solely with the beneficiary. The legal personal representative of the deceased is responsible for gathering the necessary information to determine if there is a LTA excess. They must then inform HMRC who will contact the beneficiaries to request payment of the tax. Further information can be found in this leaflet:
Q. When are benefits tested/not tested against the deceased’s LTA on death?
A. Whether or not benefits are tested for LTA purposes on death depends on the type of benefit (i.e. if from a defined benefit (DB) or a money purchase (MP) arrangement), the deceased’s age at date of death and whether the benefits are settled within the 2 year window, as illustrated in the following table:
|Benefit Type||Death Before/After 75||LTA Test||Taxable/Tax-Free To Beneficiary|
Lump sum DIS benefit (DB or MP)
Dependant’s scheme pension
Uncrystallised MP funds
Crystallised MP funds
*Benefits settled within the 2 year window are tax-free and tested against the deceased’s LTA, any benefits settled after 2 years will be taxable at the marginal rate of the beneficiary but there will be no LTA test. By ‘settled’ we mean paid as a lump sum, used to buy beneficiaries annuity or designated to beneficiaries drawdown. E.g beneficiary drawdown could be set up on a nil income basis and providing this is done within the 2 year window, income turned on at a later date will be paid to that beneficiary tax free until the fund exhausts or they die, whichever happens first.
#There is no further LTA test for crystallised funds and any benefits paid as income are always tax-free, however benefits paid as a lump sum are only tax-free if settled within the 2 year window.
Q. Are beneficiary’s drawdown benefits ever tested again on the death of the dependant/nominee/successor or at age 75?
A. No, death benefits are only ever tested (if applicable) against the original deceased member, there are no further LTA tests at any point on the recipient of the benefits.
Q. Does taking income from a dependant’s/nominee’s/successor’s flexi-access drawdown plan trigger the money purchase annual allowance?
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