Section 4 - Life time allowance

Question 1

What is the life time allowance and define its features

Answer 1

• Amount that could be built up in tax-advantaged environment
• Crystallisation of benefits in excess of LTA incurred a tax charge
• Allowance was abolished with effect from the 2024/25 tax year
• Final allowance was £1,073,100 in 2023/24 - LTA charge for benefits in excess of this
• The rate of the charge was 0% for the 2023/24 tax year (ke 6 April 2023 LTA charge was 55% for lump sums, 25% on income)
• The allowance will still be relevant when determining the amount of tax-free cash available during life or on death
• Broadly, tax-free cash allowance during the member’s lifetime will be equivalent to 25% of their previous LTA

Question 2

What is the lump sum allowance

Answer 2

• Broadly, tax-free cash allowance during the member’s lifetime will be equivalent to 25% of their previous LTA
• Known as lump sum allowance/LSA
• Total tax-free cash entitlement on death pre-75 and during lifetime will usually be equivalent to their previous LTA
• Known as lump sum & death benefit allowance/LSDBA
• Transitional protections meant that some members may have been entitled to a higher LTA
• Which means that they may also be entitled to a higher LSA/LSDBA

Question 3

What is the lump sum allowance

Answer 3

• Broadly, tax-free cash allowance during the member’s lifetime will be equivalent to 25% of their previous LTA
• Known as lump sum allowance/LSA
• Total tax-free cash entitlement on death pre-75 and during lifetime will usually be equivalent to their previous LTA
• Known as lump sum & death benefit allowance/LSDBA
• Transitional protections meant that some members may have been entitled to a higher LTA
• Which means that they may also be entitled to a higher LSA/LSDBA

Question 4

What can cause a reduction in life time allowance for early retirement

Answer 4

• Normal minimum pension age 55
Special occupations - if entitled prior to • • A-Day - reduced by 2.5% for each complete year below minimum pension age of 55
• Did not apply to pre-A-Day members of armed forces, police or fire service schemes
• Did not apply if retirement due to ill health
• HMRC rule - if benefits taken at age 45 (e.g.) they have 9 years until 55 and not 10
• Same applies to new LSA

Question 5

What is a benefit crystallisation event

Answer 5

When value of benefits are taken from pension

BCEs are no longer in existence following the abolition of the LTA. However, amounts taken under previous BCEs will need to be considered when determining available LSA/LSDBA.

Question 6

Where the value of benefits taken were tested against individual’s LTA When DC funds designated to drawdown

What is the valuation basis?

Answer 6

Market value of fund

Question 7

Where the value of benefits taken were tested against individual’s LTA member entitled to a scheme pension

What is the valuation basis?

Answer 7

Scheme pension x 20

Question 8

Where the value of benefits taken were tested against individual’s LTA when excessive increase to scheme pension is in payment

What is the valuation basis?

Answer 8

Additional increase x 20

Question 9

Where the value of benefits taken were tested against individual’s LTA when the lifetime annuity purchase from DC scheme

What is the valuation basis?

Answer 9

Uncrystallised funds:
Market value of fund used
Funds already designated into

drawdown:
Market value of drawdown fund used to buy annuity less market value of fund designated at outset

Question 10

Where the value of benefits taken were tested against individual’s LTA when DB test at 75 where no entitlement taken

What is the valuation basis?

Answer 10

Schème pension X 20 plus lump sum

Question 11

Where the value of benefits taken were tested against individual’s LTA where Test at age 75 for flexi drawdown pension (capped or flexi)

What is the valuation basis?

Answer 11

Market value of drawdown fund at 75 (less amount used to provide payment of drawdown pension)

Question 12

Where the value of benefits taken were tested against individual’s LTA where test at age 75 for uncrystalised DC funds

What is the valuation basis?

Answer 12

Amount of any remaining unused funds

Question 13

Where the value of benefits taken were tested against individual’s LTA where Uncrystallised funds designated for drawdown following member’s death before age 75 within 2 years

What is the valuation basis?

Answer 13

Market value of assets

Question 14

Where the value of benefits taken were tested against individual’s LTA where Uncrystallised funds used to buy lifetime annuity following member’s death before 75 within 2 years

What is the valuation basis?

Answer 14

Purchase price of annuity

Question 15

Where the value of benefits taken were tested against individual’s LTA where there’s a relevant lump sum death benefit

What is the valuation basis?

Answer 15

Amount of death benefit

Question 16

Where the value of benefits taken were tested against individual’s LTA where client transfères overseas

What is the valuation basis?

Answer 16

Amount of transfer value

Question 17

Where the value of benefits taken were tested against individual’s LTA where there is a prescribed event

What is the valuation basis?

Answer 17

Amount prescribed in regulations

Question 18

Where benefits started on/after A-day what factors would be applicable

Answer 18

• Revaluation adjustment based on LTA applying at the time of crystallisation
• Each crystallisation event used a % of LTA that is carried forward to next calculation
• Remember to round down in calculations i.e., 56.6666% would be 56.66% not 56.67%
• BUT, rules for BCE 5A and BCE 4 when benefits taken in 2023/24 - value of amount previously crystallised was deducted from fund value in 2023/24 to work out amount to be tested against LTA

Question 19

Where benefits started before A-day on/after April 6th what factors would be applicable

Answer 19

• For benefits already in payment before A-Day - different approach
• Only tested if member crystallised benefits from another pension on/after 6 April 2006
• Standard valuation factor used was 25:1
• HMRC assumes maximum tax-free cash taken
• Based on the value of the lifetime annuity/scheme pension received at first post A-day BCE

Question 20

Where benefits started before A-day before April 6th what factors would be applicable

Answer 20

• Valuation of drawdown where first BCE after 6 April 2006 occurred on or after 6 April 2015
- Capped - 25 x 80% of the maximum annual amount that could be paid as capped drawdown at the date of the BCE
- Flexi-access - previously flexible drawdown starting before 27 March 2014 - 25 x maximum annual amount payable as capped drawdown when declaration made to become flexible drawdown
- Flexi-access - previously flexible drawdown starting on/after 27 March 2014 - 25 x 80% of maximum annual amount that could be paid if it was capped drawdown at the date of BCE
- Flexi-access - capped drawdown converted to flexi-access on/after 6 April 2015 - 25 x 80% of the maximum amount of capped drawdown pension that could have been paid when it became flexi-access
• The calculation was 80% of 25 x max GAD because max income from capped drawdown went from 120% to 150% of GAD on 27 March 2014 (150% × 80% = 120%)
• Where member was in flexible drawdown before 27 March 2014 the 80% did not appear
• The valuation of benefits that started before A-Day only happened on first BCE after A- Day
• This sets % of LTA that was used up for those benefits that started before A-Day
• Once the % was established it was used for all future BEs - no need to re-calculate

Question 21

Who must administer a statement of LTA used

Answer 21

Scheme administrators rounded down to two decimal places

Question 22

In what scenarios might a higher LTA be applicable

Answer 22

• Not always been relevant UK individuals (UK resident)
• Transferred benefits in from recognised overseas schemes
• Pension credit for a sharing order before A-Day
• Pension credit for a sharing order after A-Day if payment to original member already in payment (and pension in payment started on or after A-Day)
• Benefits in a pre-A-Day scheme with primary protection
• Registered for fixed protection 2012
• Registered for fixed protection or individual protection 2014
• Registered for fixed protection or individual protection 2016

Question 23

How does pension credit work in a case where divorce happened before 6th April 2006

Answer 23

• Pension credit occurs on ‘transfer day’
Before 6 April 2006 enhancement is worked out using IAPC/SLA:
- where lAPC is the amount of the pension credit increased by RPI since month credit acquired and April 2006
- and SLA is the standard LTA for 2006/07 i.e., £1.5m.

Question 24

How does pension credit work in a case where divorce happened On/After 6 April 2006 for a Pension in Payment After 5 April - 2006

Answer 24

• Member’s pension would have been tested against original LTA
• Enhancement factor for ex-spouse known as ‘pension credit factor’
• Measured on the actual value of the pension credit rights from the pension in payment
• Calculated as a fraction of the standard LTA represented by the pension credit rights at the time they were acquired
• The factor is applied to the standard LTA at any future BCE
• If pension credit factor generated prior to 6 April 2012 the factor is applied to £1.8m if this is more than the standard LTA
• The uplift then added to standard LTA at the date of BCE to arrive at the individual’s LTA