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  • FIRST POST
    Hymie
    Pension Lifetime Allowance (LTA) - What does it mean?
    • #1
    • 30th Sep 08, 10:04 PM
    Pension Lifetime Allowance (LTA) - What does it mean? 30th Sep 08 at 10:04 PM
    I have a deferred company pension (Defined Benefits), I receive an annual benefits statement giving various pieces of information. One section of this information details Lifetime Allowance (LTA), giving my benefits from the scheme (for LTA purposes) as valued at approximately 150k.

    What is the meaning of this figure?

    Is it the notional pension value held within the scheme, required to pay my pension?

    If I were to take a 25% tax free lump sum from my pension, would it be 25% of this value, i.e. circa 37.5k?
Page 1
  • ulster_exile
    • #2
    • 1st Oct 08, 6:24 PM
    • #2
    • 1st Oct 08, 6:24 PM
    Changes in legislation introduced a new pensions tax regime on 06/04/2006 referred to as A Day. This replaced existing limits on benefits with a new Lifetime Allowance (LTA).

    The LTA started at 1.5million, increases each year and is currently 1.65m. You are allowed to crystallise benefits up to the LTA without incurring penalties and your provider is telling you the approx value of your benefit so that you can determine where you stand in terms of the LTA. It is the responsibility of the individual to determine whether their benefits from all schemes are under the LTA, although schemes probably won't pay benefits without seeking assurances that your benefits are under the LTA because the schemes can also be responsible for charges if benefits over the LTA are paid.

    For a DC scheme, you measure the fund value against the LTA, so if the fund was 100,000 at retirement, you would use (100,000 x 100/1,650,000 =) 6.06% of your total LTA. You would therefore have 93.94% of your LTA remaining to use on pension benefits.

    For a DB the situation is a little more complicated because you don't have a fund, but a per annum pension entitlement. Therefore, in order to 'value' these for LTA purposes, your scheme will have multiplied the deferred pension by 20 to get the value they have quoted you. There won't be a proper % of LTA used up until you actually retire (or crystallise your benefits).

    You'd need to check with your pension provider as to how they calculate the lump sum. Whilst the A Day rules allow you to take a maximum of 25% of the total value of your benefits, your scheme does not have to do this - if it is run by Trustees, they will have had to decide whether to adopt the new cash sum calculations. Also, in a DB scheme the calculation of 25% of the total value is not as straightforward as it seems (because of how to "value" a defined benefit) and they may have sought advice from the actuaries of the scheme as to how to do this in practise, so you'd need to find out how they have opted to do it.
    Last edited by ulster_exile; 01-10-2008 at 6:28 PM. Reason: Pressed 'post' by mistake!
  • MikeJones
    • #3
    • 1st Oct 08, 10:27 PM
    • #3
    • 1st Oct 08, 10:27 PM
    For a DB the situation is a little more complicated because you don't have a fund, but a per annum pension entitlement. Therefore, in order to 'value' these for LTA purposes, your scheme will have multiplied the deferred pension by 20 to get the value they have quoted you. There won't be a proper % of LTA used up until you actually retire (or crystallise your benefits).
    Originally posted by ulster_exile
    Very good technical reply from ulster-exile but note: a defined benefit scheme can use a higher factor than 20:1, so be careful (as infrequent, though it may be).

    HM Revenue and Customs (HMRC) has determined that the calculation should be to multiply the annual pension by a factor of 20:1 (this factor is 25:1 for those pensions that have already started being paid). A defined benefit scheme must use a higher factor where such higher amount has been agreed with HMRC.

    See a worked example of the Lifetime Allowance (in its current form). In reality, it is unlikely that the majority of people in the UK will be worried by it - if all else stays the same (but it rarely does!).

    Mike Jones

    I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.
  • Hymie
    • #4
    • 7th Oct 08, 7:54 PM
    • #4
    • 7th Oct 08, 7:54 PM
    Thank you for your answers to my post.

    Putting it in laymans terms, the LTA is a notional value (for tax allowance purposes) of a pension pot on which are set maximum limits by the government. I presume this is done to limit the very wealthy, using the tax-free element of pensions to their advantage.

    In a Defined Benefits scheme, a 5% p.a. return on a pension pot is assumed (hence the 20 multiplying factor).

    Taking my own situation, my deferred pension is value is at just over 7k p.a. which results in a LTA value of around 150k (versus a current limit of 1.65m).

    What I dont understand is that my deferred pension has a notional value of 150k for my LTA (required to buy my pension), whereas I have been advised that the transfer value of my pension is approximately 55k or around 1/3 the amount its value, considered for tax purposes.
  • MikeJones
    • #5
    • 7th Oct 08, 9:48 PM
    • #5
    • 7th Oct 08, 9:48 PM
    Hi Hymie,

    In a Defined Benefits scheme, a 5% p.a. return on a pension pot is assumed (hence the 20 multiplying factor).
    Originally posted by Hymie
    I think you have misinterpreted '5% p.a. return' for the term 'revaluation'.

    Revaluation is the term used to explain the increases to preserved benefits (sometimes also referred to as deferred benefits) that are given in the period between preservation date (when you ceased to be an active member) and when benefits are taken, such as normal pension age or Normal Retirement Date.

    If you left pensionable service after 31st December 1990, the requirements of the Social Security Act 1990 state that your pension scheme will have to increase your (non-GMP) pension by 5% p.a. compound or the increase in the RPI if lower between the date of leaving service and retirement. A scheme may provide higher revaluation increases if the scheme rules permit.

    GMP refers to Guaranteed Minimum Pension, which has a different rate of revaluation depending upon when you left service. You will only have built up a GMP part of your pension if you were in a defined benefits scheme that was contracted-out of SERPS between April 1978 and April 1997.

    What I dont understand is that my deferred pension has a notional value of 150k for my LTA (required to buy my pension), whereas I have been advised that the transfer value of my pension is approximately 55k or around 1/3 the amount its value, considered for tax purposes.
    Originally posted by Hymie
    They are entirely separate and distinct elements.

    I hope this helps. Shout up if not.

    Mike Jones

    I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.
  • Dean101
    • #6
    • 7th Oct 08, 9:51 PM
    • #6
    • 7th Oct 08, 9:51 PM
    The transfer value though is the amount the company needs to set aside now in order to meet your benefit at retirement.

    If the value of your benefit at retirement is estimated at 150K, the amount needed to be set aside now in order to meet that is broadly

    150K / [(1 + expected annual interest rate) to the power of no of years to retirement]

    e.g. if you're 15 years from normal retirement age and your scheme assumes a net 7% p.a. return pre-retirement (not untypical), that's 150 / (1.07)^15 = 54K (in very broad terms).

    (Much more complicated of course as mortality, death benefits, different tranches of pension, GMP, options etc all have to be allowed for but you get the general idea.)

    Hope this helps.
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