Lifetime allowance is the overall limit of tax privilege funds an individual can accrue before a tax (lifetime allowance tax) is applied. This applies to all of the members benefits across all of their UK schemes (excluding state pension).
For those with large pension plans lifetime allowance is an additional, unwanted tax but with some planning this can often be eradicated.
Since its introduction the maximum lifetime allowance has considerably reduced:
Tax year Standard lifetime allowance
Will my pension be affected by lifetime allowance
When assessing the probability of being affected by lifetime allowance we need to take into consideration current age, retirement age, expected growth rates, current contribution amount and current value of pension. In the below example we have assume growth rates of 5%, no further contributions and retirement at age 65.
Current Age Current Pension Value Value at age 65
30 £200,000 £1,100,000
40 £300,000 £1,015,000
50 £500,000 £1,039,000
When will I best tested against the lifetime allowance limit
Testing of benefits is done at Benefit Crystallisation Events (BCE). The total value plus withdrawals will be taken into consideration . These events are:
Members lifetime allowance is cumulative across different events. Example: Member drawdown of a company pensions pot of £500,000 using 47.39% of their lifetime allowance. Member then transfers their private pension worth £750,000 to a ROPs. This event would be 71.09% of a members lifetime allowance but the member only has 52.61% remaining after they designated their £500,000 scheme to drawdown. Therefore the client would have a tax charge for any amount transferred above the lifetime allowance - £195,000.
Check our our intentional pension plans - a great tool for lifetime allowance tax planning.
A transfer to an overseas pension for a non-UK resident is a clever way to avoid future accruals against lifetime allowance. Taking this crystallisation event before going above the LTA amount means a client could avoid LTA entirely.
Clients can also consider forcing through early crystallisation events (entering flexi drawdown at age 55) to avoid higher lifetime allowance charges in the future – this would then give them the opportunity to withdrawal the pension in its entirety at a later stage (without another test)
For overseas transfers check out our ROPs
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