Civil_Service_Pensions

Questions and answers for pensioners

The Lifetime Allowance and your Civil Service pension

What is the Lifetime Allowance?

The Lifetime Allowance (the LTA) is part of the tax rules on pension saving introduced on 6 April 2006 ('A-day'). The Lifetime Allowance is not a limit on the value of your pensions. It is a limit on the amount of tax-relieved pension saving that you can have. So, while there is no limit to the size of pensions that can be built up after April 2006, you may have to pay extra tax if your pensions are worth more than the Lifetime Allowance.

The Chancellor of the Exchequer has set the Lifetime Allowance at £1.5 million for the tax year 2006-7, and it will rise to £1.6 million in 2007-8.

How are pensions valued for Lifetime Allowance purposes?

• Pensions that are already in payment on A-Day are valued by multiplying the annual amount by 25.
• Pensions which come into payment after A-Day are valued by multiplying the annual amount by 20 and adding on any automatic lump sum.
• Personal pension funds are valued according to the value of the investments.
• The state pension is not valued for Lifetime Allowance calculation purposes.

I am already drawing my Civil Service pension. Do I need to worry about the Lifetime Allowance?

• If all of your pension saving is already in payment, and you have no intention of starting a new pension, you do not need to worry about the Lifetime Allowance.
• If you have other pension savings which will not be in payment at April 2006 (for instance, if you have another job or you have a personal pension fund which you have not yet used to buy an annuity), then you should value your pensions at 5 April 2006 (see above). If the combined valuation of your pension(s) in payment plus your pension saving is more than £1.5 million then you should consider registering with the Inland Revenue (now part of HM Revenue and Customs (HMRC)) for transitional protection. This will allow you to 'protect' the value of your pension saving at its 5 April 2006 level and will mean that you do not pay more tax than you should. You will have three years from 6 April 2006 to register for transitional protection.
• If your pensions are valued at more than the Lifetime Allowance, any new pension saving you make after 6 April 2006 will be subject to extra tax when the pension comes into payment.

Example 1

John retired recently at age 60 and he has a pension in payment of £70,000pa. He also has a frozen pension of £12,500pa from an earlier job, but this will not come into payment until he is 65.

John's pension in payment is valued at 25 x £70,000 = £1,750,000 John's frozen pension is valued at 20 x £12,500 = £250,000

So the total value, for LTA purposes, of John's pension saving at A-day will be £1,750,000 + £250,000 = £2 million. This is above the LTA. Because John still has undrawn pension savings, it is important that he registers for transitional protection to ensure that he does not pay extra tax when he draws his frozen pension.

Will the Lifetime Allowance mean that my wife might get an extra tax bill when I die?

Pensions paid to widow(er)s and other dependants of scheme members will not be tested against the Lifetime Allowance. However, any additional lump sums paid on your death (typically, if you die within your pension protection period¹) will normally be tested against your Lifetime Allowance and may result in extra tax.

If, at April 2006, you were within your pension protection period¹, you should consider whether the lump sum paid on death would take your pension benefits over the Lifetime Allowance. To the extent that the lump sum (taken together with other pension benefits) goes over the Lifetime Allowance, the excess will be taxed at 55%. If you are in this position, you should consider electing to have any lump sum paid on your death after retirement paid instead as a 'pension protection' lump sum. Pension protection lump sums will be taxed at 35% rather than being tested against the Lifetime Allowance. If you want to do this, please contact Capita Hartshead.

Example 2

James, a member of the classic scheme, retired on 6 July 2005. His pension is £60,000 a year.

For LTA purposes, James's pension is valued at 25 x £60,000 = £1.5m. This means that James will have used up his entire LTA.

If James were to die before 6 July 2007, the scheme will pay the balance of 2 years' pension payments (for instance, £60,000 if he were to die in July 2006). If James elects for this lump sum to be paid as a pension protection lump sum it would be taxed at 35%. If James had done nothing, the lump sum will be tested against James's remaining Lifetime Allowance. James has no Lifetime Allowance left, so the whole lump sum would be taxed at 55%.

I left with an early retirement package and am receiving an 'Annual Compensation Payment (ACP)'. Am I treated the same as other pensioners?

People who are receiving ACPs have their pension preserved for payment at age 60. Unless you have chosen to draw your pension early on an actuarially-adjusted basis, you are not yet a Civil Service pensioner.

For Lifetime Allowance purposes, you should value your preserved pension by multiplying by 20.

If you have got another job since leaving the Civil Service, remember that the Lifetime Allowance applies to the total of all your pension saving. If your pension saving adds up to more than £1.5 million at 5 April 2006 you should register with HMRC for transitional protection to ensure that you don't pay more tax than you should when you come to draw your pension.

Example 3

Jane, aged 58, was made redundant five years ago. Jane received her tax-free pension lump sum when she left and she is now receiving an ACP of £55,000 a year. Jane's Civil Service pension (also £55,000) is preserved for payment when she reaches 60. Jane also has an AVC fund of £30,000 which she has not yet used to purchase an annuity.

Since leaving the Civil Service, Jane has been working for herself and saving into a personal pension. At April 2006, her personal pension fund is valued at £120,000.

Jane's ACP is not valued for LTA purposes. Her tax-free lump sum is not valued either, as she drew this before A-day.

Jane's preserved pension is valued, for LTA purposes, at 20 x £55,000 = £1,100,000
Jane's AVC fund is valued at its fund value of £30,000
Jane's personal pension fund is valued at its fund value of £120,000.

Jane's total pension saving at A-day is valued for LTA purposes at £1,100,000 + £30,000 + £120,000 = £1,250,000. This is below the LTA.

How do I find out more?

• See the HM Revenue and Customs' Newsletter No 1 available on their website: www.hmrc.gov.uk/pensionschemes/newsletter1.htm[External website].
• Visit the Civil Service Pensions website www.civilservice-pensions.gov.uk/pensions_and_tax_high_earners.aspx
• Contact Capita Hartshead (phone 08701 699700 or email csp.enquiries@capita.co.uk )
• Contact Civil Service Pensions (email LTA@cabinet-office.x.gsi.gov.uk)
• Ask your current employer or your pensions provider
• Depending on your circumstances, you may wish to consider seeking independent financial advice to help you understand how the new tax rules will affect you personally.

Endnotes

1. The pension protection period is the first 2 years from retirement in PCSPS classic - the '1972' scheme - and the first 5 years from retirement in premium and classic plus - the '2002' schemes. [Back to content for endnote one]