Lifetime Allowance (LTA) Protection
6 April 2006 / Members
The new “Lifetime Allowance” and Protection from the Lifetime Allowance Charge
The Finance Act 2004 introduces a single tax regime that will apply to all UK tax privileged pensions from 6 April 2006 (‘A’ Day). This new regime introduces a personal “Lifetime Allowance”, which is the total allowable value of tax privileged pensions you may have from all sources, before you incur an additional tax charge. For the 2007/2008 tax year the value of the Lifetime Allowance is £1.6 million and the Lifetime Allowance will increase each year. This equates to a pension with of £80,000 per annum, or in the Teachers’ Scheme, a pension in the region of £69,565.21 per annum which also carries a cash entitlement of £208,695.63.
The level of the Lifetime Allowance means that most people will be unaffected, but this will be relevant to members with large pension benefits. It should also be noted that all members retiring after 5 April 2006 will be asked to certify whether their benefits exceed the Lifetime Allowance as part of revised retirement procedures.
If the value of your total pensions and associated lump sums exceed the Lifetime Allowance, your benefits may be subject to a tax additional charge, called the Lifetime Allowance charge. The additional charge is 25% of the value excess pension benefits above the Lifetime Allowance (or 55% of any excess benefits paid in a lump sum form). The charge is over and above the tax you would already pay on these excess benefits.
If you are entitled to or are prospectively entitled to benefits in excess of this level, you may apply to protect existing benefits as at 5 April 2006. This can be done by making an application to HM Revenue & Customs for either “primary” or “enhanced” protection or a combination:
- Primary Protection – this can be utilised by persons whose total pensions valued at ‘A’ Day are greater than £1.5 million as at 5 April 2006. This enables you to protect your benefits that are in excess of the Lifetime Allowance and will enable you to continue to build up further pension. E.g. a person with tax privileged pensions of £3 million who applies for primary protection will be given a certificate giving exception from the Lifetime Allowance charge for 200% of the Lifetime Allowance. Please note that a Lifetime Allowance charge may still be payable on any part of the pension value which exceeds 200% of the individual’s Lifetime allowance.
- Enhanced Protection – is an alternative to primary protection intended to protect the value of benefit accrued to 5 April 2006 from the Lifetime Allowance charge. This form of protection requires that with effect from 5 April 2006, “relevant benefit accrual” does not occur in defined benefit arrangements such as the Teachers’ Pension Scheme. “Relevant benefit accrual” could occur if the benefit provided by the scheme exceeds those accrued at 5 April 2006 (increased by allowable rates to the date that benefits are taken). Enhanced protection will be lost if “relevant benefit accrual” occurs or defined contribution benefits are accrued such as payments to an Additional Voluntary Contribution scheme or any other money purchase arrangement. Where Enhanced Protection is lost, benefit in excess of the Lifetime Allowance may be subject to the Lifetime Allowance charge.
- Primary and Enhanced Protection – an individual with a pension value of more than £1.5 million as at 5 April 2006 can apply for both types of protection. If the Enhanced Protection certificate lapses, say because “relevant benefit accrual” has occurred, it is possible to revert to the rules regarding Primary Protection instead.
It is also possible to protect pension benefits arising from a divorce or pension sharing order as at 5 April 2006.
The decision to apply for protection will be yours but if you think that you may be affected we strongly recommend that you seek independent financial advice to help you understand how the new rules will affect you personally.
In order to make this decision, you will require certain information about your benefits from all your current and previous pension schemes. Once you have collected all the information that you need from each scheme, you and your advisers will be able to see if the value of your benefits exceeds the Lifetime Allowance.
Please note you will have three years from 6 April 2006 to register your funds for protection with the HM Revenue & Customs. If you wish to consider Enhanced Protection however, you must make up your mind before 6 April 2006 if you are paying Additional Voluntary Contributions (AVCs).
To access further information regarding the different types of protection please click here
www.hmrc.gov.uk/manuals/rpsmmanual/RPSM03100000.htm
To view the relevant forms for protecting benefits, click here
www.hmrc.gov.uk/pensionschemes/tax-simp-draft-forms.htm
If your benefits exceed the Lifetime Allowance and you wish to claim protection from the Lifetime Allowance charge, Teachers’ Pensions will need to see the relevant protection certificate which is issued by HM Revenue & Customs before benefits are taken.
Back to Announcements