Understanding options around pension allowances.
An individual has a single lifetime allowance in relation to the value of benefits they can draw from their pension scheme(s) – currently £1,055,000. The value of any authorised benefits paid out in excess of their allowance is subject to a tax charge known as the lifetime allowance charge.
An individual may decide to draw part of their pension benefits in stages. An event that could result in lifetime allowance being used up is called a ‘benefit crystallisation event’ (BCE). This usually happens when the individual starts to draw a pension but there are other occasions that could trigger a lifetime allowance charge. If the pension benefit being tested exceeds the member’s available lifetime allowance at that point, a lifetime allowance charge will be due on the excess.
The lifetime allowance charge applies when, at a BCE, the value crystallising in an individual’s pension scheme is worth more than their available lifetime allowance:
- if the excess is a pension, there is a 25% charge
if the excess is a lump sum, there is a 55% charge.
If an individual considers that they may be liable to the lifetime allowance charge they may decide to consider taking steps to increase the current lifetime allowance. There are two options available: one is called ‘fixed protection 2016’ and the second is called ‘individual protection 2016’.
There are a number of conditions attached to these options, but if those conditions have been met then the lifetime allowance may be able to be increased from the current level of £1,055,000 to as much as £1,250,000.