After taking financial advice you may decide to draw benefits from your Barnett Waddingham Small Self-Administered Scheme (SSAS). If this is the case, you will receive a benefit illustration from your Client Manager showing the benefits you may draw from the SSAS, along with a ‘Lifetime Allowance Declaration’ for completion.
The Lifetime Allowance Declaration helps us to determine the two things:
1. your available Lifetime Allowance, and
2. whether a Lifetime Allowance Charge will be due to HM Revenue & Customs (HMRC) when you take your benefits.
As the Declaration asks for a variety of information, I thought it would be helpful to clarify some of the concepts that apply to the Lifetime Allowance and to provide some practical examples of the test against the Lifetime Allowance.
The Lifetime Allowance explained
The Lifetime Allowance is the maximum amount of savings you can hold in your pension arrangements tax efficiently. Your pension savings are tested against the Lifetime Allowance when you “crystallise”, or switch on, your benefits, or if you die before switching them on.
They are tested again at age 75 if you still have funds designated for drawdown pension and/or funds that have not yet been crystallised. It is worth noting that you could have a number of pension schemes and it may be possible to ‘phase’ the crystallisation of your pension savings within each pension scheme. Therefore, different parts of your pension savings may be tested against the Lifetime Allowance at different times before, and at, age 75.
The Standard Lifetime Allowance for the tax year ending 5 April 2021 is £1,073,100. We expect it is due to increase in line with the Consumer Prices Index (CPI) on 6 April 2021 to around £1,078,900.
Stephen is over 55 years of age and wishes to crystallise all of his pension savings in his SSAS on 31 January 2021. He has no form of protection against the Lifetime Allowance (see below) nor used any of the Lifetime Allowance previously.
The value of his SSAS at 31 January 2021 is £540,000 and the Standard Lifetime Allowance at that date is £1,073,100. Stephen wishes to draw 25% (i.e. £135,000) of his SSAS pension savings as a Pension Commencement Lump Sum, while designating the remaining 75% (i.e. £405,000) into ‘Flexi-access Drawdown’ for future pension payments.
On this basis, his Lifetime Allowance usage in the SSAS would be as follows:
- Pension Commencement Lump Sum: £135,000 / £1,073,100 = 12.58% of the Lifetime Allowance
- Flexi-access Drawdown Fund: £405,000 / £1,073,000 = 37.74% of the Lifetime Allowance
As Stephen’s Lifetime Allowance usage is less than 100% of the Lifetime Allowance, his pension savings in the SSAS will not be subject to a Lifetime Allowance Charge at this time. He would have 49.68% of the Standard Lifetime Allowance available to use in the future.
Some people have applied to HMRC to protect their Lifetime Allowance at a level higher than the Standard Lifetime Allowance. If you have been granted Lifetime Allowance protection you should either have a certificate or online reference number from HMRC confirming this, and you should note the value of your personal Lifetime Allowance to help you with your retirement planning.
For example, those with Fixed Protection from 6 April 2012 have a personal Lifetime Allowance of £1.8 million, whilst those with Fixed Protection from 6 April 2016 have a personal Lifetime Allowance of £1.25 million.
It is important that you do not lose this protection inadvertently and it is worth noting that you can still apply for Fixed Protection 2016 and Individual Protection 2016 to increase your Lifetime Allowance, provided that you meet certain criteria. More details are to be found here.
As in the first case study, Emily is over 55 years of age and wishes to crystallise all of her pension savings in her SSAS on 31 January 2021. She has not used any of the Lifetime Allowance previously and has Fixed Protection (from 6 April 2012). The value of her SSAS at 31 January 2021 is £540,000 and her personal Lifetime Allowance is £1,800,000.
Emily wishes to draw 25% of her SSAS pension savings as a Pension Commencement Lump Sum and designate 75% for Flexi-access Drawdown for future pension payments. On this basis, her Lifetime Allowance usage in the SSAS would be as follows:
- Pension Commencement Lump Sum: £135,000 / £1,800,000 = 7.50% of the Lifetime Allowance
- Flexi-access Drawdown Fund: £405,000 / £1,800,000 = 22.50% of the Lifetime Allowance
As Emily’s Lifetime Allowance usage is less than 100% of her personal Lifetime Allowance of £1,800,000, her pension savings in the SSAS will not be subject to a Lifetime Allowance Charge. In addition, she would have 70% of her personal Lifetime Allowance available to use in the future.
If you have already used some of the Lifetime Allowance in another pension policy or arrangement, we will need to take this into account when testing the funds held in your SSAS against the Lifetime Allowance.
The Scheme Administrator of your other pension policy or arrangement should have provided you with confirmation of the Lifetime Allowance usage when you crystallised those pension savings; for example, by purchasing an annuity or designating funds for drawdown. The Scheme Administrator should also provide you with confirmation of the Lifetime Allowance usage annually thereafter, if your pension savings are in a drawdown fund.
If you have a Scheme Pension, which has increased in payment by more than 5% and the rate of inflation in any tax year since 5 April 2006, you may have used up some Lifetime Allowance in addition to the amount when you opted for Scheme Pension. If so, the Scheme Administrator of the Scheme Pension should confirm this to you.
Transferring your pension savings to an overseas pension scheme arrangement will also use up some of your Lifetime Allowance and, again, the transferring arrangement should have confirmed how much of the Lifetime Allowance was used with the transfer.
Ben is 60 years of age and wishes to crystallise all of his pension savings in the SSAS on 31 January 2021. At this date, he has already used 59.15% of his personal Lifetime Allowance as follows:
- 45.07% of the Lifetime Allowance for his Self-Invested Personal Pension (SIPP); and
- 14.08% from a Pension Commencement Lump Sum payment and annuity purchase.
Ben has Fixed Protection 2016 giving him a personal Lifetime Allowance of £1,250,000. Ben wishes to draw a Pension Commencement Lump Sum and designate funds for Flexi-access Drawdown for future pension payments.
The value of Ben’s SSAS at 31 January 2021 is £540,000. However, taking into account his Lifetime Allowance usage above, his available personal Lifetime Allowance is £510,625; i.e. 40.85% of £1,250,000.
He therefore does not have sufficient personal Lifetime Allowance to draw all of his SSAS pension savings without incurring a Lifetime Allowance Charge.
Instead, Ben has scope to draw the following benefits within his available personal Lifetime Allowance of £510,625:
- Pension Commencement Lump Sum: £127,656 / £1,250,000 = 10.21% of the Lifetime Allowance
- Flexi-access Drawdown Fund: £382,969 / £1,250,000 = 30.63% of the Lifetime Allowance
In addition he has funds in excess of his personal Lifetime Allowance of £29,375; i.e. £540,000 - £510,625.
The excess funds can be used to provide him with an additional lump sum or additional pension from the SSAS or a combination of both. Ben does not have to crystallise these funds on 31 January 2021 and can defer taking them until a later date. However, if he chooses to crystallise them at the same time he crystallises all his other benefits in the SSAS, the excess funds are subject to the following Lifetime Allowance (income tax) charges:
- 55% of any of the excess funds he draws as a lump sum, or
- 25% of any of the excess funds he designates for Flexi-access Drawdown for future pension payments. It is worth noting that when he draws the pension payments from the SSAS they will also be subject to income tax at his marginal rate.
Ben opts to designate the excess funds for drawdown pension. A Lifetime Allowance Charge of £7,343.75 (25% of £29,375) will be due and £22,031.25 (75% of £29,375) will be designated for Flexi-access Drawdown. This will use up an additional 1.76% (£22,031.25 / £1,250,000) of his personal Lifetime Allowance, bringing his total Lifetime Allowance usage to 101.76%. The Lifetime Allowance Charge may be paid by the SSAS and has to be paid to HMRC within a defined timescale, being no later than 45 days after the end of the quarter during which the crystallisation happened.
The Lifetime Allowance came into effect on 6 April 2006. Benefits in payment prior to this date are treated differently to those that come into payment on or after this date.
If you have benefits that came into payment prior to 6 April 2006 these benefits will be used to adjust your available Lifetime Allowance when you come to crystallise any other pension savings you have after 6 April 2006. We therefore ask for details of these benefits so we can make the necessary adjustments to your available Lifetime Allowance.
Calculating and managing your Lifetime Allowance
Hopefully, the three examples above help to clarify how the Lifetime Allowance usage is calculated in certain circumstances prior to age 75. The Lifetime Allowance test at age 75 also includes a test on the benefits that have already been tested against the Lifetime Allowance. My colleague, Robert Hunschok, looked at the age 75 Lifetime Allowance test here.
"Everyone’s circumstances are different and there are many factors to take into account when calculating an individual’s Lifetime Allowance and any Lifetime Allowance Charge."
Some of the matters to consider are set out in our blog.
Keeping track of your own Lifetime Allowance usage will be a key part of your retirement planning, so obtaining regulated financial advice is recommended. Your Barnett Waddingham Client Manager will be able to confirm your actual or potential Lifetime Allowance usage in the SSAS when asked to assist with this.
If you would like to talk about this topic or have any questions in general, please contact your Barnett Waddingham Client Manager. Or you can get in touch with me below if you do not have a Client Manager.
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