Lifetime Allowance
What is the lifetime allowance?
The lifetime allowance or Standard Lifetime Allowance (SLA) restricts the total amount of pension fund an individual can build up from contributions that have received tax relief; it is set by the Government. It applies to all the different pensions that you hold combined together (excluding the basic state pension and state second pension). Any benefits taken that are of greater value than the SLA, known as 'excess' funds, will be subject to a tax 'recovery charge'. The scale of this charge is designed to take back the benefits of tax relief and growth on the 'excess' of the fund.
The SLA of £1.5 million for the tax year 2006/2007 has been set by the Treasury and will increase annually until 2010/2011 tax year when it will have reached £1.8 million. The yearly figures increment as follows:
- 2006/2007 >> £1.5 million
- 2007/2008 >> £1.6 million
- 2008/2009 >> £1.65 million
- 2009/2010 >> £1.75 million
- 2010/2012 >> £1.8 million
Further Treasury Orders will set out the SLA’s from 2011/2012 on. The SLA cannot reduce and there is no legislative commitment to increase it annually.
What is Pension Commencement Lump Sum or PCLS?
Pension Commencement Lump Sum or PCLS is the new name for Tax Free Cash Lump Sum. Because you don’t have to take all your PCLS at the same time from a policy, as you had to under the old rules otherwise it had to be used to buy an annuity, a new name was needed to distinguish it from the old meaning. You can take a PCLS of up to 25% of the value of your policy fund as long as all the PCLS you have taken does not exceed 25% of the SLA then current. You will need to keep records of the PCLS that you have taken.
What is the effect of the SLA on my pensions?
Your combined pension arrangements must not exceed the current SLA (see above). The figures that have to be taken into account in this calculation are:
- any pensions from which you have not yet taken any benefits
- any pension annuities currently being paid to you
- any PCLS that has been paid to you after 6 April 2006
- any income drawdown or unsecured pension payments being received by you
Each of the above has a different way of being calculated (see below) so that it can be tested against the SLA.
Any pensions from which you have not yet taken any benefits
If the arrangement is a final salary scheme then the pension, before commutation for a cash sum, is multiplied by 20. Any separate lump sum, other than by commutation, is then added to this value.
If the arrangement is a money purchase scheme then the member’s total fund value, unless a scheme pension is paid, is used. This applies to personal pensions. If a scheme pension is payable then the scheme pension is multiplied by 20.
Any pension annuities currently being paid to you
- The annuity is multiplied by 25.
Any PCLS that has been paid to you after 6 April 2006
- The full value of the PCLS is taken into account.
Any income drawdown or unsecured pension payments being received by you
- The value of the drawdown or unsecured pension in that tax year is taken as the value.
All the above values are then added together to see if the SLA has been exceeded.
I've Heard About Lifetime Allowance Protection – What’s This?
These are Transitional protections for pension benefits earned up to 5 April 2006 in respect of high earners, those in occupational schemes and those with Buyout Policies.
There are two types of protection:
- Protection against the excess or Recovery Charge
- Protection for tax free lump sums
Recovery Charge Protection
There are two main types:
- Primary Protection
- Enhanced Protection
Primary Protection
If the value of your pension benefits was within the limits of the old rules but exceeded the SLA on 5 April 2006, you can protect it against any Recovery Charge (charge on the excess over the SLA) by registering for primary protection. This gives you an Individual Lifetime Allowance (ILA). Protection in respect of future benefit growth will be linked to future increases in the SLA so that your ILA increases at the same rate as the SLA. You can still continue to contribute but a Recovery Charge may apply if benefit values exceed the ILA.
Enhanced Protection
If the value of your pension benefits was within the limits of the old rules but exceeded the SLA on 5 April 2006 or you believe they may do in the future you can register for this protection. However, you cannot put any further contributions into any pension scheme or this protection will be lost. All benefits, when they come into payment, will normally be exempt from the Recovery Charge. You can at any time before age 75 switch from Enhanced Protection to Primary Protection.
Amounts in occupational schemes and buyout contracts above Inland Revenue limits must be excluded from valuations for the purpose of protection from the Recovery Charge.
Anyone who has £1.5 million or more in pension benefits as at 5 April 2006 can opt for either or both of these forms of protection and has until 5 April 2009 to register.
Protection For Tax Free Lump Sums
This is designed to protect two types of people:- Those who have the right to a tax-free lump sum of more than 25% of the value of the benefit coming into payment. Such a right will only arise in an occupational or buy-out scheme. If any benefit is transferred out of such an arrangement then generally this automatic protection is lost.
- Those who have the right to a tax-free lump sum greater than that usually permitted under the post A-Day rules where that lump sum does not exceed 25% of the value of the pension rights.
IMPORTANT: You need to keep records of all the various pension payments that you receive, as they need to be taken into account when you take any further benefits. Whenever you take any benefits your pension provider will supply you with a statement saying the amount of the benefits taken and what this currently represents as a percentage of the SLA. You should keep these statements and inform any adviser of the amounts that you have taken when you decide to take any more.
