The Lifetime Allowance (LTA)
How much is the LTA?
The Chancellor of the Exchequer has announced the basic value of the LTA
for the first few tax years as follows:
Basic value of the LTA
|
Year
|
LTA
|
|
2006–7
|
£1.5m
|
|
2007–8
|
£1.6m
|
|
2008–9
|
£1.65m
|
|
2009–10
|
£1.75m
|
|
2010–11
|
£1.8m
|
The LTA will be reviewed every five years.
How do I value my pension for the LTA?
There are some simple rules for valuing pensions. The important thing to
remember is that the LTA applies to the total amount of
your pension saving – whether in occupational (employer-sponsored) pension
schemes or personal pensions.
Money purchase pensions such as personal pensions or Additional Voluntary
Contributions have a fund value associated with them. The value of these
pensions is the fund value.
Any occupational pensions where the scheme is promising to pay a set amount
of pension on retirement in the future are valued by multiplying
the current pension by 20. Any lump sum benefit (for instance in
PCSPS classic) is taken at its current value. This rule
applies to frozen pensions from previous employments as well as to any
pension being built up in current employment.
Any pensions in payment at A-day are valued by multiplying the
annual amount by 25.
If you are receiving an Annual Compensation Payment following early
retirement or redundancy, bear in mind that this is not a
pension for the purposes of the LTA.
Example
Ann is in classic. Ann earns £160,000 and has 20 years’
service so she has built up a pension of £40,000 plus a lump sum of
£120,000. Ann also has AVCs with Scottish Widows and these are valued at
£30,000.
Ann’s pension benefits are valued, for LTA tax purposes, as follows:
Values of Ann’s pension benefits
|
Item
|
Amount
|
|
Pension: £40,000 x 20
|
= £800,000
|
|
Lump sum
|
= £ 120,000
|
|
AVC fund
|
= £ 30,000
|
|
Total
|
= £950,000
|
What happens if my pension is worth more than the Lifetime Allowance?
If your pension is worth more than the LTA when you draw your benefits,
extra tax will be due. This is worked out as 25% of the excess of the value
of your pension over the LTA (and 55% of any excess lump sum benefits).
Your Civil Service pension administrator will pay the tax and we will
recover this by reducing your pension and, if appropriate, your lump sum.
Alternatively, if you wish, you can pay the tax up front.
Example
George is a member of classic. He retires in December 2006
with a pension of £80,000 plus a lump sum of £240,000 . This is valued for
tax purposes at £1.84m (£80,000 x 20 + £240,000).
Excess over the LTA = £1.84m – £1.5m = £340,000
LTA charge tax = 25% x £340,000 = £85,000
Tax recovered in this case by reducing pension by £4,250
George receives a net pension of £75,750 and lump sum of £240,000. His
pension will be subject to income tax in the normal way, but his lump sum
is tax-free.
You can view an example
pension statement [PDF 32KB] for a member
retiring after A-day and whose benefits exceed the LTA.
How do I find out if the Lifetime Allowance (LTA) is an issue for me?
To value your pension benefits, carry out a
stocktake [PDF 141KB] and use our calculator
[XLS 53KB].
The calculator will work out a projected value of your pension benefits and
help you determine whether or not you are likely to be affected by the LTA
at A-day (6 April 2006) or in the future.
You might like to look at an example of a completed
input screen [PDF 17KB] before you use the
calculator yourself.
