Lifetime Allowance Changes impact on UK and QROPS Pensions
Previously, the UK’s Lifetime Allowance was set at £1.25m and, in April 6, 2016, the UK Government is set to lower the amount to £1m.
The decision to do so will most likely bring a host of changes. The transformation affects lifetime earners amassing more than £1m in their pension over the course of their career. Pension schemes are tested at certain points during the life of the pension (BCE) and any excess over the LTA results in additional tax charges.
According to The Telegraph, “Last week chief executives of some of Britain’s biggest financial institutions condemned the move to a £1m ceiling as a step too far. They called for the lifetime limit to be scrapped all together, arguing that it will damage aspirations and discourage long-term investing.”
How does the LTA affect my pension?
Pension Schemes could exceed the £1m limit as follows:
- Defined contribution – also known as Money Purchase Schemes:
Private pensions including pensions that received employer contributions also come under the LTA limit. The limit will include any associated growth. All pension schemes have to be aggregated when performing the LTA calculation.
- Defined Benefit Pensions or Final Salary schemes – These schemes have a cash value which is based on salary and not contributions plus investment growth. The amount has to be multiplied by a factor of 20 in order to calculate the capital equivalent value. Tax free lump sums are also included in the LTA calculation.
What is Lifetime Allowance Testing?
Events, known as benefits crystallization events (BCE), trigger a testing of LTA. While all events are detailed here, the primary events are:
- When any income or a lump sum is taken from a Member’s pension upon reaching the age of retirement (55).
- When members turn seventy-five years of age all pension funds not previously accessed, as well as those pension funds in drawn down, will undergo testing.
- Death before the age seventy-five, this is also a Benefit Crystallization Event which will trigger LTA testing, affecting payments to beneficiaries.
- Benefit Crystallization Event also occurs when Members choose to transfer funds from their pension into a QROPS. This is tested at time of transfer only – once in a QROPS no further LTA testing will occur.
How much Tax will I pay?
If a member exceeds the LTA, how the excess is paid will determine the LTA tax, for example, if they choose to take a lump sum, they will be subject to a 55% tax on the excess above the LTA.
If the member decides to take a pension income, they will be subject to a 25% tax charge on the excess above the LTA. However, if this was a transfer to a QROPS, members will only see a 25% tax on funds exceeding the LTA. Again, once the pension is transferred to a QROPS, it will no longer be tested against the LTA.
About Lifetime Allowance Protection
Individual protection may be available to you if your pension savings exceeds the lifetime allowance. Use this application for protection of your lifetime allowance. To be considered for protection, submission of your form must occur on or before April 5, 2017. Alternatively, the use of a QROPS could be a solution as once the pension is transferred, no further testing will occur.
Taking Immediate Precautions
With all the talk taking place in various media outlets like The Telegraph, for example, regarding Lifetime Allowance, it’s critical to put your financial picture into perspective. Is it time for you to get advice and make changes to your pension schemes?
Please contact us today with your questions about LTA. Alconbury Trust is a Registered Investment Advisor registered in Fl and TX. Alconbury Trust LLC is not an attorney or tax specialist. For information only and not a solicitation of sale.