Ongoing lifetime allowance enhancements and reductions
Publication date:
28 November 2016
Last updated:
18 December 2023
Author(s):
Technical Connection
The lifetime allowance is one of many aspects of pension legislation that is getting ever more complex as we get further away from A-day in 2006. We are nearly 11 years on and it has gone up from £1.5 million to £1.8 million and now we are having to cope with a standard lifetime allowance of just £1 million. With this new reduction it is ever more important to understand any enhancement or reductions that can apply to this headline number.
The protections from the reduction in the lifetime allowance, such as fixed and individual protection, are clearly the most obvious adjustments to the standard lifetime allowance and will be the most common ones we will see. Currently, individual protection 2014, fixed protection 2016 and individual protection 2016 are available to those eligible, with individual protection 2014 applications closing on 5th April 2017. There is no deadline for individual and fixed protection 2016 but they should still be considered sooner rather than later to ensure that the client remains eligible and has the correct information to apply for protection.
Reduced lifetime allowances
There are only two sets of circumstances in which an individual
would not be entitled to their full standard lifetime allowance.
The most common is where they had benefits in payment before
6th April 2006, in which case their lifetime allowance
is reduced to take account of these benefits. The reduction is
calculated at the first point they take benefits after A-day, which
means for those with increasing benefits in payment it is better to
crystallise something sooner rather than later so less lifetime
allowance is lost to this benefit. Many have crystallised a very
small amount in order to ensure that future increases do not impact
on uncrystallised funds. Although there is little that can be done
now as the most recent reduction has already occurred it may be
worth considering applying for fixed protection 2016, if eligible,
and crystallising a small part using a lifetime allowance of £1.25
million. If they later lose fixed protection 2016 then the
crystallisation will have been done using the higher figure and no
recalculation will occur.
The other reduction in the lifetime allowance relates to those who
have the right to retire before age 50 by virtue of a protected
pension age. In this case the lifetime allowance is reduced by 2.5%
for each whole year between the date they take the benefits and the
normal minimum pension age, currently 55. For those who have the
right to retire between age 50 and 55, there is no reduction
applied so they would be entitled to their full lifetime allowance.
Protected pensions ages stem from the rights some individuals had
which, due to their profession, meant they could retire early, such
as footballers, deep sea divers etc. Early retirement ages that are
not protected pension ages are now only available to certain
pension schemes, such as Armed Forces and Fire Fighters.
A-day enhancement factors
On the flip side of the reductions there are cases where
enhancements to the lifetime allowance apply. There are two
transitional protection enhancement factor - these are in relation
to the change in the way benefits were tested at A-day. The one we
all know about and deal with regularly is the primary protection
factor. This was only available to those with benefits worth in
excess of £1.5 million at 5th April 2006 and the factor
gives you that amount extra lifetime allowance so a factor of 1,
gives you one extra lifetime allowance.
The other transitional protection enhancement factor is a
pre-commencement pension credit factor which gives an enhancement
to those who have received a pension credit before 6th
April 2006. This factor enhances the lifetime allowance by the
value of the pension credit, increased by RPI to 5th
April 2006. It should be noted that it isn't possible to have both
a pre-commencement pension credit factor and a primary protection
factor because the value of the pension credit would already have
been taken into account in the primary protection calculations.
Current enhancement factors
There are three enhancement factors that can apply for today.
The first is again in relation to pension credits and is called the
"pension credit factor". This doesn't apply to all pension credits,
only given after 5th April 2006 and that came into
payment after this date but before the pension sharing order. The
enhancement applies because the benefits have already been tested
once and will be tested again when the receiving spouse chooses to
take benefits.
The second enhancement is the recognised overseas scheme transfer
factor, it applies to transfers into the UK from a recognised
overseas pension scheme. There is a need to ascertain if the
recognised overseas scheme includes any benefits have had UK tax
relief since 6th April 2006. This amount is called the
"relevant relievable amount" and relates to any contributions and
accrual where the individual was a member of a recognised overseas
pension scheme but was not a relevant overseas individual.
The third enhancement factor is also in relation to those working
overseas but it relates to periods of membership of a UK registered
pension scheme where the member is a relevant overseas individual.
These individuals will not have received tax relief on the
contributions or accrual but the benefits will count towards the
lifetime allowance. This enhancement factor ensures they are not
penalised for this period or periods of membership. The various
periods can be aggregated over different periods of overseas
employment.
Thoughts
The enhancement factors for some may be small and may not seem like they will be relevant in the future. However it isn't possible to tell what will happen in the future. To this end it is key that all applications are made in a timely fashion to ensure that all the details required to make the application for the protection can be easily sourced and deadlines are not missed.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.