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