The lifetime allowance (LTA) for pension savings is a limit on the value of benefits from your pension schemes that can be paid out without triggering an extra tax charge.
How much is the lifetime allowance?
The LTA is currently £1.5m. However, this is reducing to £1.25m from April 2014. It applies to all pensions you have, excluding your state pension.
How to calculate the value of your pension benefits?
In the NHS pension scheme you multiply your expected annual pension by 20 and add on any pension commencement lump sum (PCLS) as follows:
|Value of pension benefits: Example|
Expected pension of £60,000 x 20
Pension commencement lump sum (PCLS) of £60,000 x 3
Total pension pot
If you have any private pension plans you must add the value of them to the above figure. In this example we will assume there are no private pensions.
What are the charges if you exceed the lifetime allowance and how are they paid?
There will be a tax charge on the excess as follows:
£1,380,000 minus £1,250,000 = £130,000.
The excess in this example is therefore £130,000.
A tax charge of 25% will be applied to the excess.
£130,000 x 25% = £32,500 which is then divided by 20, to give £1,625.
As a result the pension of £60,000 will be reduced by £1,625pa to £58,375pa.
If you are unsure whether you will be impacted by the changes seek independent financial advice from an adviser who understands the NHS pension scheme.
You should also obtain an up-to-date pension statement in order to work out the above figures.
What can you do to reduce your impact to the LTA?
There are various options to consider and it is not a one size fits all solution so even if your colleague decides to go down one route it may not be the best route for you.
You should discuss the following options with your adviser and seek advice as to what option is most suitable for you. But here are some options you may consider:
- 24 hour retirement: This allows you to take your benefits and return to work subject to your employer’s written confirmation. You must retire fully for 24 hours and work no more than 16 hours per week for the next 4 weeks.
- Take a bigger PCLS and a reduced pension: This can alter the value of your pension pot and in turn reduce the value of your pension pot against the LTA.
- Opt out of the NHS pension scheme: It is possible to opt out of the NHS pension scheme for future service. This will result in you being treated as a deferred member of the scheme. Any decision to become a deferred member has a significant impact on a number of valuable associated benefits and as a result should not be taken lightly. It is unlikely to be in the best interests of the vast majority of scheme members to make the decision to opt-out.
- Allocation of pension to a dependent: Subject to certain conditions you may give up (allocate) part of your pension to provide a pension to another person after your death.
Transitional protection and how to use this
Each time the LTA is reduced, complex transitional arrangements are put in place to protect people who have already built up very large pension pots. The arrangements that will be put in place prior to the changes in April 2014 are as follows:
Fixed protection 2014
From 6 April 2014 your lifetime allowance will be fixed at £1.5m with fixed protection 2014. This means you can take pension savings worth up to £1.5m without paying the lifetime allowance charge. You'll have to apply before 6 April 2014 to get fixed protection 2014.
You can't have fixed protection 2014 if you already have primary, enhanced or fixed protection. You will lose fixed protection 2014 if you:
- Have a contribution paid to any of your money purchase pension pots
- Build up new benefits in a defined benefits or cash balance pension pot above a set amount. Therefore as a GP, if you apply for fixed protection you would have to opt out of the NHS Pension Scheme
- Join a new pension scheme - unless you're only transferring pension savings from one of your existing schemes into the new scheme
- Start saving in a new pension pot either under an existing pension scheme or a new pension scheme
Individual protection 2014
As well as fixed protection 2014, the government has announced that individual protection 2014 will be available when the lifetime allowance is reduced to £1.25m. Details are expected to be as follows:
- Individual protection will give you a LTA equal to the value of your pension rights on 5 April 2014 (between £1.25m and a maximum of £1.5m)
- You will not lose individual protection 2014 by making further savings in to your pension scheme
- Any pension savings in excess of your lifetime allowance will be subject to a lifetime allowance charge.
You'll be able to apply for this from 6 April 2014.
- Kim Spence is a specialist medical financial adviser at Hentons Chartered Accountants, an AISMA member firm