Pension Lifetime Allowance - pre 6th April 2024

Level of LTA

The standard LTA was an amount fixed in legislation for specific tax years (6 April to 5 April).

The 'standard LTA':

Impact of LTA

When members took benefits from registered pension schemes (crystallise benefits), they used up a proportion of their LTA. If the individual took more benefits later, the additional benefits were tested against the remaining proportion of the member's LTA.

Where given as a percentage it is rounded down to two decimal places e.g. 28.777 is 28.77% NOT 28.78%. However, care should be taken when using only the percentages as this will prove inaccurate in certain conditions (see below for example).

Pension Tax Manual PTM081000 & PTM164400

Example 1: Standard Lifetime Allowance

Mark took benefits with a value of £500,000 when the standard lifetime allowance was £1.8m. He then took a further £500,000 when the standard lifetime allowance was £1.5m.

How much could he have crystallised without incurring a lifetime allowance tax charge in 2023/2024. The table below shows both ways of calculating this.

Benefit Crystallisation Events

When a BCE occurred, the value crystallised was measured for LTA purposes - the capital value of this amount depended on the type of event taking place - see below.

There were originally 9 BCEs and 13 when the LTA was abolished.

The table below summarises all the Benefit Crystallisation Events and the value for LTA test purposes.

Notifying Lifetime Allowance usage

The lifetime allowance system was supported by an information exchange and reporting regime. There were different systems for reporting and paying the lifetime allowance charge depending on whether the BCE occurred during the member’s lifetime or as a result of a BCE after the death of the member. The member needed to be told by the scheme administrator (or an insurance company if they administer the scheme), via a BCE statement the following information:

• how much lifetime allowance had been used up by the BCE. This information was required so that the member could work out the remaining LTA available for future BCE’s and correctly complete any tax returns
  
  
• if there was a liability to the lifetime allowance charge and if so, whether the scheme administrator had paid or intended to pay part or all of the tax due
  
  
• If an insurance company was paying a scheme pension or lifetime annuity using funds that derived from a registered pension scheme, they had to tell the member annually how much lifetime allowance had been used up in respect of those benefits

Where the scheme administrator wasn't required to provide an annual BCE statement for the tax year, they were required to provide the required information within three months of a BCE that had occurred under the scheme in respect of the member.

Where, following the death of a member, the scheme administrator paid a defined benefits lump sum death benefit, or an uncrystallised funds lump sum death benefit they had to supply the following information to the deceased members personal representative within 3 months of making the payment: 

• The amount of lump sum

• The payment date

• The percentage of the standard LTA used by the payment

Where, following the death of a member, funds were designated to provide a dependant’s or nominee’s flexi-access drawdown fund (BCE5C), or the beneficiary(ies) became entitled to a dependant’s or nominee’s annuity from unused uncrystallised funds (BCE5D) the scheme administrator had to provide the following information to the deceased member’s personal representative within 3 months (remember the scheme administrator was not responsible for deducting any LTA excess tax charges from these BCEs. 

The information that had to be provided on a BCE 5C was:

• the amount designated
  
  
• the date of designation, and
  
  
• the percentage of the standard LTA used up by the BCE 5C.

The information that had be provided on the BCE 5D was:

• the amount or market value of assets applied to the purchase of the annuity
  
  
• the date the person became entitled to the annuity, and
  
  
• the percentage of the standard LTA used up by the BCE 5D.

 Pensions Tax Manual PTM164100, PTM165100

As a result of the abolition of the lifetime allowance all schemes had to write to all members of their scheme who had uncrystallised rights as at 5th April in their scheme and had used up some LTA in that scheme.  This one-off statement had to be issued in the 2024/2025 tax year and was to allow members to ascertain their transitional allowance usage under the post 5th April 2024 regime. 

Effective Date of a Benefit Crystallisation Event

This was crucial as it determined which year's LTA the event was tested against.

Pension benefits

The effective dates were as follows:

• BCE 1 – the date the funds were designated as being available to provide the member with drawdown pension
  
  
• BCEs 2, 3, 4 and 6 - the date the member acquired an actual (as opposed to a prospective) entitlement to payment of the relevant authorised pension benefit under the arrangement concerned.
  
  
• BCE 5, 5A, 5B - the effective date of the BCE was the member’s 75th birthday.
  
  
• BCE 5C - the date the deceased member’s funds were designated as being available to provide the dependant or nominee with drawdown pension
  
  
• BCE 5D - the date the dependant or nominee acquired an actual entitlement to the annuity
  
  
• BCE 7 - is the date a relevant lump sum death benefit was paid
  
  
• BCE 8 - was the date an overseas transfer was made
  
  
• BCE 9 - the effective date of the BCE varied according to which regulation of The Registered Pension Schemes (Authorised Payments) Regulations 2009 - SI 2009/1171 the payment was made under.

Pensions Tax Manual PTM088220

Pre-commencement pensions

This related only to tax approved pension payments from UK tax approved pension schemes or policies, so excluded any state benefits.

Pre-commencement pensions already in payment before 6 April 2006 were treated as if they crystallised immediately before the first BCE on or after 6 April 2006.

Pre A day pensions in payment were multiplied by 25 (not 20) times the yearly rate in force on the same day as the first BCE occurring after 6 April 2006.

However, for a pre-commencement pension in capped drawdown, where the first BCE occurred after 5th April 2015. The amount of maximum GAD needed to be multiplied by 80% to reduce the new maximum GAD of 150% back down to the 120% GAD figure (120/150 = 0.80).

Example

A member had drawdown income from a contract started before 6th April 2006. As at 10 June 2016 the maximum income payable from the plan was £20,000 but the member was only taking £15,000.

The member had not taken any other benefits since and decided to vest the rest of the pension benefits.

Therefore, the drawdown contract used up: (£20,000 x 0.80) x 25 / £1.00m = 40% of LTA leaving 60% available for the benefits being vested.

Prevention of overlap for Drawdown Pensions

Drawdown pensions (other than those established prior to 6 April 2006) were tested against the LTA twice.

The first test was through BCE 1 when the funds were first designated and then again either on:

• Scheme pension (BCE 2), or

• Annuity Purchase (BCE 4), or

• reaching age 75 (BCE 5A), or

• on transfer to a Qualifying Recognised Overseas Pension Scheme (BCE 8).

To ensure there was no double counting only the increase in funds crystallised under BCE 1 were tested at the second designation. i.e. investment growth less payments of income made.  Any income taken was not added back in, simply the arrangement value at age 75 less the original BCE 1 amount used LTA.

Example

In August 2006, the member designated £300,000 as a drawdown (unsecured pension at the time) fund.

This used up £300,000/£1,500,000 - 20% of the standard LTA.

The member then decided to buy an annuity with those funds in June 2017. At that time the funds had grown to £350,000.

This used up a further (£350,000 - £300,000) / £1,000,000 - 5% of the standard LTA.

Where partial uplifts are done or multiple designations have been made the calculations are done proportionately.

A negative amount does not result in an increase to the member's LTA.

Lump sums

A pension commencement lump sum (i.e. tax-free cash - BCE 6) was always deemed to arise immediately before the entitlement to the linked pension.

This applied even though there was no requirement that the pension and the linked tax-free cash were paid at the same time.

While people would normally want their tax-free cash as soon as possible, payment was allowed up to 6 months before and 12 months after the start of the linked pension.

Finance Act 2004 Sch 29, Pt1 Para1-(1C)

Lump Sums on death

Where the member had died, any crystallisation events occurring under BCE7 (relevant lump sum death benefit) were treated as occurring immediately before the death of the member.

Where relevant lump sum death benefits were paid to more than one recipient, the BCE for each was treated as occurring simultaneously. This was to ensure any LTA charge which may have been applicable was proportioned between all the recipients.

Lump sum death benefits (BCE 7) were normally tested against the LTA in the tax year they were paid. However, where a death benefit was paid after 5 April 2016, i.e. when the LTA reduced to £1.0m, but death was prior to this date the lump sum was tested against £1.25million.  There was no similar provision when the LTA reduced from £1.8m to £1.5m and from £1.5 to £1.25.

Any death payment to a beneficiary didn't count towards the beneficiary's LTA.

Age 75

All benefits were tested against the member's LTA by the member's 75th birthday.

This was through either BCE 5, 5A or 5B.

The only BCE that could be triggered after age 75 was a post-retirement scheme pension increase beyond the permitted margin (BCE 3).

For unvested funds even though there was a BCE at age 75, where benefits were subsequently taken post 75 the BCE percentage 'crystallised' at age 75 was ignored for the purposes of calculating benefits.

If the member had uncrystallised funds on their 75th birthday any excess over the LTA was charged at 25%. The funds technically become crystallised at that point, but subject to remaining unused LTA (as per the paragraph above), PCLS and UFPLS was still available.

If the member wished to take an LTA excess as a lump sum they had choose to take the excess to provide this (if the scheme allowed) before they reached 75 (they must have used or would use up 100% of the LTA to do this).

Simultaneous Benefit Crystallisation Events

When BCEs occurred simultaneously, the member decided the order the BCEs took for the purpose of the LTA test. BCE6 (payment of a pension commencement lump sum) occurring alongside BCE1, 2 or 4 was always deemed to have occurred first. This was important where benefits were over the LTA to ensure the scheme(s) with the most valuable benefits could be vested without an LTA charge.

Where 2 or more BCE7s occurred upon the death of the member, these were treated as occurring at the same time.

Transfer after a Benefit Crystallisation Event

Regulations allowed registered pensions schemes and insurance companies to transfer sums and assets representing pensions in payment. These were not in themselves BCEs unless they were to a QROPS.

Exemption for Drawdown contracts in existence before 6 April 2006

Drawdown contracts that started before 6 April 2006 were exempt from any further BCEs (other than at the first BCE after April 2006, to determine remaining LTA, as detailed in the pre-commencement pension section above).

Lifetime Allowance Charge

If the member was alive, the Scheme Administrator had check the amount crystallising each time there was a BCE to ensure that the appropriate tax was paid on any funds taken above the LTA. The Scheme Administrator had to calculate the capital value of the benefits coming into payment, to verify the percentage of the LTA being used. As discussed above, the method of doing this depended on the BCE.

If the percentage of the LTA crystallising was greater than the percentage available, the excess became a 'Chargeable amount' and the 'Lifetime allowance charge' applied.

The tax rate depended on whether the excess was paid as a lump sum - called a Lifetime allowance excess lump sum and charged at 55% - or if retained to pay pension benefits, charged at 25% (tax is then payable on the income the member receives at their marginal rates).

If the member was alive, the liability for paying the LTA charge fell jointly on the Scheme Administrator and the member. Normally, the Scheme Administrator was obliged to deduct the tax charge before a 'retirement' payment was made. If, however, the charge arose on the member's death, the recipient of the payment was liable.

The scheme administrator had to  pay, and account for, the LTA charge to HMRC on a quarterly basis (through the Accounting for Tax Return).

Where a chargeable amount applied, the scheme administrator had to send the member a notice showing;

• the level of the Chargeable amount;
  
  
• how this was calculated; and
  
  
• the level of LTA charge deducted (or how they proposed the tax due should be paid).

The provider could have become liable for any LTA charge not paid. The provider could have been liable, potentially, for additional charges and fines, unless they had evidence that they acted on information from the member that was believed to be reliable.

In these circumstances, specific information had to be provided to HMRC within certain time limits. If they consider that the scheme administrator acted in good faith, then the member becomes solely liable for the charge.

Finance Act 2004 - S214 - 226, Sch 32

In the 2023/2024 tax year, as the first steps to the abolishment of the LTA the 55% tax charge was changed to a marginal rate tax charge and the 25% tax charge was changed to 0%.