If the value of benefits at retirement exceeds the LTA in a relevant tax year, the value of benefits in excess of the LTA will be taxed accordingly, unless you’re entitled to transitional protection.
For the purposes of valuing benefits against the LTA, every £1 of annual pension coming into payment is multiplied by 20. The value of any separate (automatic) lump sum is added to this capitalised value.
As an example, a member taking a pension of £50,000 per annum with an automatic lump sum of £150,000 would have their benefits valued against the LTA as follows:
Value of pension:
£50,000 per annum x 20 = £1,000,000
Value of lump sum = £150,000
Total value of crystallised rights = £1,150,000
This would represent a value of 115.00% of the LTA assuming the LTA is £1 million (1,1500,000/£1,000,000).
The amount by which the benefits exceed the LTA or protected LTA is known as the chargeable excess. The Teachers’ Pension Scheme does not permit the chargeable excess to be paid as a LTA Excess Lump Sum taxable at 55%.
In our example the value of benefits in excess of the LTA is £150,000. This will be paid as pension and thereby subject to a tax rate on the excess of 25%. The member and the scheme are jointly and severally liable for the LTA charge.
The charge is paid by the Teachers’ Pension Scheme to HM Revenue and Customs (HMRC). The member's pension is then reduced to recover (in instalments) the charge paid by the Scheme The factors as well as being age specific are also dependent upon whether the retirement event is taken under ‘normal health’ or ‘ill health’ conditions.
The amount of the reduction on account of the LTA =
Amount of the tax / an age (and health) specific factor
If we continue with our example, and assume that the member is a NPA 60 member (in normal health) at age retirement with no transitional protection (Primary, Enhanced or Fixed protection) he will be liable to an LTA charge of :
£150,000 x 25% = £37,500.
Teachers' Pensions will pay this tax charge directly to HMRC on his behalf.
In order to recover this charge from the member, an annual reduction in the member's gross pension will be applied by dividing the amount of charge paid by Teachers' Pensions by the relevant factor (the normal health factor for a member 60 attained is; 19.66):
£37,500 / 19.66 = £1,907.43 per annum for the whole of the member’s life.
Subsequent Pensions Increase will then be applied to the pension after allowing for the LTA deduction.
* For the latest factors see www.teacherspensions.co.uk/members/resources/factors