DSG’S Monthly Tax Tip

Defined Benefit Pensions, Reduction to the Lifetime Allowance from 6 April 2016

Posted by Winston Ruddick

Independent Financial Advisor

  • T: 0151 243 1233
  • E: wr@dsg.uk.com
Wed 02nd, Mar

The standard Lifetime Allowance (LTA) will reduce from £1.25 million to £1 million from 6 April 2016. It will remain at this level for tax years 2016/17 and 2017/18. From 6 April 2018 the standard LTA will be indexed annually in line with the Consumer Prices Index (CPI).

Tax Year   Lifetime Allowance
2015/16     £1.25 million
2016/17     £1 million
2017/18     £1 million
2018/19     £1 million + CPI

How do I calculate the capital value of my defined benefit pension?
The capital value of your defined benefit pension is calculated as follows: Annual Pension x 20 + Pension Commencement Lump Sum

When will the reduction in the standard LTA affect defined benefit pension members?
A standard LTA of £1 million will have an effect when you take benefits from your pension on or after 6 April 2016.

What happens if my pension benefits are more than the standard LTA?
If your pension benefits exceed the LTA then a tax charge, known as the Lifetime Allowance Charge will apply.

The LTA charge is 25% if the excess is taken as scheme pension and 55% if the excess is taken as a lump sum. You will only pay a tax charge on the amount by which you exceed the LTA, not on your entire pension or lump sum.

Fixed Protection 2016 and Individual Protection 2016
The government announced that it is to offer new protections to members who could be impacted by the reduction of LTA to £1 million;
- Fixed Protection 2016 (FP2016).
- Individual Protection 2016 (IP2016).

Applications for FP2016 and IP2016 will be online using a new HMRC online self-service tool, which is expected to be available from June 2016.

There will be specific restrictions which apply if you elect to take Fixed Protection 2016, the most important restrictions will be;
- No further contributions into a money purchase pension arrangement.
- No further build-up of benefits in a Defined Benefit that exceeds “relevant benefit accrual”.

For most Defined Benefit Pensions “relevant benefit accrual” is the percentage by which the CPI (Consumer Prices Index) increases in a year. If the increase in your Defined Benefit Pension is greater than this you will have exceeded “relevant benefit accrual” and as such Fixed Protection 2016 will be lost.

What should I do if I am worried about exceeding the LTA?
- Request an up to date benefit statement from your pension scheme.
- Calculate the capital value of your Defined Benefit Pension (Annual Pension x 20 + Pension Commencement Lump Sum).
- Contact us to discuss what options are available to you to reduce any potential tax charge.

Leave a comment

Comments...

Posted by najam sethi

I have been following these tips and it sure has been very effective! For now I am more trying to figure out using the ukessays discount code I just received. It has been super nice getting to learn about these though, thanks!

Posted by George M. Nell

Winston Ruddick is a good financial adviser. I will appreciate you and will advice you to keep providing these financial advises to people and businesses. I think you should guide a bit to some educational institutions who do not pay taxes. Furthermore, you should also give lectures to those students who are looking for Online Life Experience Degree as such people need financial advises thorough which they can support themselves financially. Your advises are worth sharing.

Posted by Alexandr Lukin

Open the installed software and run it one, change these settings according to your convenience. Showbox for pc

Posted by Maxim Voronin

ShowBox — movies and TV shows for the whole family you can watch on your Android smartphone, and even better on tablets! Showbox Here is the direct download link to get latest movies on Android smartphones.
1

Post a comment

 
   
 

Cost of doing business is rising - we need to ask why?

Fri 07th, Apr

As we enter a new tax year, I find it disconcerting to see that the cost of doing business is rising.

How Can You Best Deal With Customer Disputes?

Thu 23rd, Feb

The Federation of Small Businesses published a report (Tied Up 2016) recently exploring the cost of disputes to UK small businesses.

Street Wisdom is Coming to Liverpool!

Mon 20th, Feb

TimScottHR is bringing Street Wisdom to Liverpool City Centre.

How Trump's triumph could inspire businesses across the UK

Tue 24th, Jan

Why you can learn from Trump’s election campaign victory