The Lifetime Allowance (also known as LTA) is the total capital value of all your pension arrangements, not including your state pension, pension credit, or any partner’s or dependant pension you may be entitled to, which you can build up without triggering a tax charge.
The Fund will let you know the value of your LGPS benefits on retirement and ask you about any other pensions you may have in payment, so we can work out whether we need to deduct a recovery tax charge. Also, under HM Revenue & Customs (HMRC) rules, if you recycle your lump sum back into a pension arrangement, there will be a tax charge.
The lifetime allowance covers any pension benefits you may have in all tax-registered pension arrangements, not just the benefits you have in the Shropshire County Pension Fund.
What is the limit?
The lifetime allowance has been steadily reducing from 2012/13, as below:
|Tax Year||Lifetime Allowance|
The standard lifetime allowance was reduced from £1.25 million to £1 million from 6 April 2016. Although the allowance may seem a large amount, you may be affected if you have a lot of service and receive a high salary or have other large pension arrangements.
How is the lifetime allowance calculated?
For pensions that start to be drawn on or after 6 April 2006, the capital value of those pension benefits is calculated by multiplying your annual pension by 20 and adding any lump sum you draw from the pension scheme.
For pensions already in payment before 6 April 2006, the capital value of these is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.
When any LGPS benefit, or any other pension arrangement you may have, is put into payment you use up some of your lifetime allowance – so even if your pensions are small and individually will not be more than the lifetime allowance, you should keep a record of any pensions you receive. If you have a pension in payment before 6 April 2006, this will be treated as having used up part of your lifetime allowance.
If your LGPS benefits are more than your lifetime allowance limit you will have to pay tax on the excess. If your excess benefits are paid as a pension the charge will be 25%, with income tax deducted on the ongoing pension payments; if the excess benefits are taken as a lump sum they will be taxed once only at 55%.
You can choose to pay the tax charge immediately by a reduction to your lump sum or you can ask the scheme to pay the charge for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit.
If you exceed your lifetime allowance, you may have to pay a lifetime allowance tax charge when your benefits are paid to you. If the value of your benefits is higher than the available lifetime allowance, you can choose how to take your benefits and the tax charges that apply.
A lifetime allowance quick check tool can now found on the LGPS members website.
Lifetime allowance protection
When the Government announced that the lifetime allowance limit would be reduced from £1.25 million to £1 million from 6 April 2016 protections were introduced if you were in excess of the £1 million allowance at 5 April 2016, or if you are expected to exceed this level when your benefits are taken.
To use the protections you will need to apply directly to HMRC before taking your benefits otherwise they will be assessed against the reduced £1 million limit.
Individual Protection 2014 (IP2014) and Individual Protection 2016 (IP2016) are two types of protection that are available if your pension benefits had a value of more than £1.25 million on 5 April 2014 (for IP2014) or more than £1 million on 5 April 2016 (for IP2016).
Another type of lifetime allowance protection is Fixed Protection 2016, please note this does not apply if you remained a member of the LGPS after 5 April 2016, as benefits would have built up, causing the protection to be lost. If you applied for this protection, you must tell HMRC that the protection was lost from 6 April 2016.
HMRC have an online lifetime allowance calculator for pension scheme members to apply to protect their pension savings from the lifetime allowance tax charge. This service replaces the paper process for applying for fixed protection 2016 (FP2016) and individual protection 2016 (IP2016) and replaces the online form for applying for individual protection 2014 (IP2014).
Please note you will need to apply for protection with HMRC before taking benefits otherwise they will be assessed against the reduced £1 million limit.
You can apply online for pension protection through the Government Gateway. You must inform Shropshire County Pension Fund your protection registration number. To apply for protection visit the gov.uk website or click here.