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'A-Day' Pension Simplification Lifetime Allowance Calculator

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Since April 2006, significant changes to the tax treatment of pension schemes have come into effect in the United Kingdom.
Whilst most of the changes will benefit the majority of people, for a significant number of people, especially those with existing large pension funds, it is likely to be anything but simple.
One of the main changes is that the current restrictions on what you can pay into a pension each year have been relaxed, with the focus moving to restricting the overall size of pension funds. See the section of pension simplification for more details.
The specific focus of this calculator is to work out whether the current value of your pension funds is likely to take you over the lifetime allowance threshold on 6 April 2006. [The initial threshold is £1.5 million, increasing over time].
Fund values over the lifetime allowance will be subject to a 'recovery charge' - in effect a tax of 55% on the excess benefits if taken as a lump sum, or 25% if taken in the form of income. However, if you foresee this as a real possibility, it is possible to 'protect' your current benefits by way of claiming 'primary' or 'enhanced' protection. [If you suspect that you need to claim any form of protection, then seek professional financial advice as soon as possible].
Whilst the lifetime allowance will not affect the majority of people with private or company sponsored pension schemes, read on - do not assume that your pension funds are valued nowhere near this figure.
If you hold mainly Personal Pension plans, this is quite straightforward, as the value of your benefits is the fund value of the plan. i.e. if you have a personal pension worth £100,000 then this is the figure to be set against your lifetime allowance.
However, things get slightly more complicated if you have any:
  • pensions already in payment
  • income drawdown (pension fund withdrawal) plans in payment
  • final salary (defined benefit) scheme benefits
  • 'overfunded' occupational money purchase scheme benefits
  • pension credits as a result of pension sharing orders upon divorce
Firstly, pensions in payment (referred to as 'crystallised benefits') are valued using a factor of 25 times the pension amount when determining the benefits (for pensions already in payment, any lump sums paid out can be disregarded).
Therefore, if you are currently receiving a pension of, say, £7,000 from a previous employment, but are still working, the value of the pension for the lifetime allowance calculation is £7,000 x 25 = £175,000.
If you are taking benefits under an 'income drawdown' plan, the value of the crystallised benefits is also 25 times the MAXIMUM income allowable under the plan. As an example, you have a drawdown fund, which allows you to withdraw £20,000 per annum at the last valuation, but you elected to draw only £10,000 per annum in income. For the purpose of the lifetime allowance calculation, the value of the pension is £20,000 x 25 = £500,000.
If you are a member of a final salary pension arrangement, then a factor of 20 is used to calculate the value for the lifetime allowance. For instance, you have been a member of a final salary scheme for 5 years as at 5 April 2006. Your pensionable salary is £45,000 and the accrual rate of the scheme is 1/60th per annum. This would give you a pension of £3,750 per annum. Multiply this by a factor of 20, which gives a figure of £75,000 to set against the lifetime allowance.
Tax-Free Lump Sum benefits do not need to be included if they are commuted from the main scheme benefits. Many final salary schemes with an accrual rate of 1/60ths or lower generally offer a higher pension, or a lower pension PLUS a tax-free lump sum.
However, if the lump sum is additional, then this needs to be set against the lifetime limit. Many public sector schemes in the UK operate with an accrual rate of 1/80ths per year, and pay out a lump sum based on 3/80ths of your final salary for each year of service, without commuting this amount from the main pension. Using the same salary as above, the pension would be £2,812.50 per annum, and multiplied by a factor of 20, this equals a figure of £56,250 against the lifetime allowance. You then need to set the lump sum benefit of £8,437.50 against your lifetime allowance. (A total of £64,687.50 will be set against the lifetime allowance).
Another point that may could catch a few individuals with significant benefits in occupational money purchase arrangements (such as EPPs), but are currently 'overfunded', is that the maximum transfer value is the amount that can be set against the lifetime allowance.
To illustrate, assume you have an EPP with a fund value of £1,000,000. However, the maximum pension that you could take, based on current earnings of £70,000 is c. £46,666 per annum. A maximum transfer test has been undertaken, and it determined that the maximum transfer value allowable to a personal pension is £900,000.
In this instance, assuming there are other pension funds from previous occupations, you may wish to protect the benefits. However, the Revenue feels it unfair to protect a benefit that is greater than what is allowable under the pre-April 2006 rules. Therefore, the maximum amount that you could protect is £900,000 relating to this pension scheme.
Clearly this is a point that will only come to affect a very small proportion of high earners / company directors with large pension funds - but in the context of this calculator, you will need to input the value of the Maximum Pension allowable under pre-April 2006 rules, not the actual fund value.
If you have problems with overfunded schemes, you need to discuss the options with a Pension Consultant or IFA, if you have not done so already.
Finally, if you are entitled to a pension sharing credit as a result of a divorce settlement, or have a pension debit against your pension rights, the situation can become quite complex, especially if transitional protection from the lifetime allowance is being considered. [In this context, pension sharing is often referred to as 'earmarking' - and is quite different from pension 'splitting']. Ultimately, it depends on whether the divorce was concluded before or after 6 April 2006, but such calculations are out of the scope of this calculator.
Therefore, to use the calculator, enter the required figures relating to your current pension benefits, bearing in mind some of the special points raised above, if they are applicable to you.
PLEASE NOTE: This calculator does not deal with the issue of Tax-Free Cash protection (this is a completely different issue, although related) or the appropriateness of primary protection over enhanced protection. The purpose is to flag whether you may have an issue, in order to allow you to deal with it. If you make a claim for transitional protection against the lifetime limit, you have until 5 April 2009 to make the claim.

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