Approaching the UK Pension Lifetime Allowance.
The UK pension lifetime allowance (LTA), currently set at £1,073,100, is a limit on how much pension benefits you can build up before being subject to the lifetime allowance charge.
The allowance has varied over the years, but has generally been decreasing as the government reduce the tax benefits on pensions:
| Tax Year | Lifetime Allowance |
| 2022/23 | £1,073,100 |
| 2021/22 | £1,073,100 |
| 2020/21 | £1,073,100 |
| 2019/20 | £1,055,000 |
| 2018/19 | £1,030,000 |
| 2017/18 | £1,000,000 |
| 2016/17 | £1,000,000 |
| 2015/16 | £1,250,000 |
| 2014/15 | £1,250,000 |
| 2013/14 | £1,500,000 |
| 2012/13 | £1,500,000 |
| 2011/12 | £1,800,000 |
| 2010/11 | £1,800,000 |
| 2009/10 | £1,750,000 |
| 2008/09 | £1,650,000 |
| 2007/08 | £1,600,000 |
| 2006/07 | £1,500,000 |
As you build up pension benefits, whether that’s through a defined contribution or defined benefit scheme, you will edge closer to the LTA limit.
How is a Lifetime Allowance charge calculated?
Defined Contribution (DC) Pensions:
Defined contribution schemes are quite simple for calculating the LTA charge. This is because the value of the pension is based on the value of the underlying investments.
Whenever you crystallise part of your pension, the amount crystallised is tested against your available LTA. For example, you may have a pension valued at £1 million and decide to crystallise £200,000 and take the 25% as a tax free lump sum. The £200,000 is then tested against your available LTA (£1,073,100). In this scenario, the percentage of your LTA used is 18.6%, therefore 81.4% remains. Until you crystallise benefits that exceed the LTA, no charge will be due.
Once you have crystallised benefits that exceed the LTA, the tax charge then becomes due.
Defined Benefit (DB) Pensions:
As explained in a previous blog, defined benefits provide a guaranteed annual income rather than a pot to drawdown from. Because of this, the LTA calculation is done differently.
The test is done when you start taking the annual benefits from your scheme. The amount assessed is 20 times your expected annual pension. If you were to receive an annual pension of £30,000, this would be a total assessable value of £600,000.
How is the tax charge collected if the LTA is exceeded?
For a defined contribution scheme, a tax charge is levied at 25% if the amount is taken as drawdown (regular income), or 55% if it’s taken as a lump sum.
For defined benefit schemes, generally, the scheme would pay the tax charge on your behalf (at 25%) and then recover it by reducing the annual benefit paid to you.
Applying for fixed protection
Fixed protection came into place in 2016 when the lifetime allowance was reduced from £1.25 million to £1 million. As a result, you can apply for the protection to have your lifetime allowance set at £1.25 million instead of £1,073,100. You can apply for this protection as long as you stopped contributions or stopped accruing benefits in your scheme from 6 April 2016.
In cases where your benefits are nearing the current LTA, it would make sense to apply for the protection as it would provide a greater limit before the LTA charge commences.
Transferring to a QROPS
As a non-UK resident, you can transfer your pension to a QROPS which takes it outside of UK jurisdiction. Generally, we wouldn’t recommend a QROPS as a SIPP is a much more cost-effective solution. However, where there are LTA concerns, the benefit of mitigating/minimising the LTA charge can outweigh the extra costs of a QROPS.
A transfer to a QROPS is classified as a benefit crystallisation event (BCE8) by HMRC. When your pension is transferred, the value of your pension will be assessed against your lifetime allowance. Anything exceeding the allowance will be subject to a 25% tax charge.
The advantage, however, is that any subsequent growth of your pension is outside of UK jurisdiction and will not be assessed against your lifetime allowance in the future.
Get in touch
If you have any questions regarding your UK pension, please do not hesitate to get in touch.
