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April 6 2019 heralded the start of a new tax year and brought with it a small but welcome increase to the Lifetime Allowance (LTA) which is now £1.055m.
With recent news articles highlighting the ever increasing number of people being caught by the LTA, Annemarie Allen explains what it is and how the Barnett Waddingham public sector benefits consultancy team can assist pension schemes and their members to navigate their way through the pension tax maze.
An ever changing LTA value
Since its introduction in 2006 the LTA has been set at many values, changing nine times to date.
Commencing at £1.5m, it reached a high of £1.8m for the period 6 April 2010 to 5 April 2012, and a low of £1m for the period 6 April 2016 to 5 April 2018. Every time it reduced, protections were put in place so that members with savings at or about the level of the pre-reduction LTA could apply to retain a higher LTA.
"Since 6 April 2018, under current legislation it is increasing by the measure of Consumer Price Index (CPI) to the preceding September. So on 6 April 2019, the LTA increased from £1.03m to £1.055m and will remain at that level until 5 April 2020. This is a small but nevertheless welcome increase. "
So what does this all mean? What is the LTA and how does it work?
The LTA is the maximum amount of tax free pension savings allowed over an individual’s lifetime. The value is measured upon actual entitlement to receive benefits, known as a Benefit Crystallisation Event or a BCE for short. For most people this is when their pension is put into payment.
In defined benefit schemes such as the Local Government Pension Scheme, the Firefighters and the Police Pension Schemes, in summary, the value of the pension benefits is calculated as the amount of the lump sum received (known as a pension commencement lump sum, PCLS) plus 20 x the pension payable.
Under tax rules, a member may take as a tax free lump sum the lesser of a quarter of their available LTA and a quarter of the LTA value of their benefits crystallising.
Where a member’s benefits exceed LTA limits, a one off LTA tax charge is payable upon the excess benefits at 25% of the excess pension and 55% of any excess lump sum.
The value of the benefits taken are then expressed as a percentage of the LTA so that the next time a member has pension benefits that crystallise, they and their pension scheme will know how much LTA they have available, if any.
A complex maze catching an increasing number of members
With the LTA remaining significantly lower than its starting level, many members are, and will, breach the LTA. This blog provides a high level overview of the LTA, but beneath it is a maze of detail and complications.
In addition to this, the annual allowance limits tax free pension growth every year and also catches an increasing number of pension scheme members. This will be covered in a future blog.
Our public sector benefits consultancy team assists pension administrators, employers and individual members to navigate their way through it all. From presentations to calculations and explanations, training and workshops, contact Annemarie to discuss how we can support you.