Lta

desthemoaner

Can someone please explain to me what is meant by LTA, or lifetime allowance, with regard to pensions? I have two pensions: one in payment, with an LTA of around 21 per cent, and another yet to be paid (but in hope of payment soon), with an LTA of just 1.4 per cent.



Is it actually feasible, or indeed possible to accumulate an LTA of 100 per cent or more, and if so, what happens?

hugheskevi

Can someone please explain to me what is meant by LTA, or lifetime allowance, with regard to pensions?

Every individual has a limit to the value of pension they can accrue before having to pay a tax charge. The Annual Allowance deals with the amount that can be contributed and receive tax relief in a single tax year, whilst the Lifetime Allowance deals with the amount which can be accumulated in total.

Currently the lifetime allowance is £1.25m, but if an individual has one of the various protections they may have a higher lifetime allowance.

Valuing defined contribution pensions is simple and accurate. Valuing defined benefit pensions is more complicated (particularly for Annual Allowance) and less accurate.

Is it actually feasible, or indeed possible to accumulate an LTA of 100 per cent or more, and if so, what happens?

Yes, quite easy, although often avoiding/protection measures will have been taken to avoid such a circumstance.

In that event a tax charge is due. The charge is 25% (on top of income tax due) if levied on income, or 55% if levied on a lump sum (from memory, if not it is very similar).

jamesd

If those are defined benefit pensions you can now forget about the lifetime allowance unless you have a personal pension as well.

For personal pensions an issue is that there is a second lifetime allowance test at age 75. If you don't draw money out of a pension fast enough you can end up being over the LTA then even if you weren't at say 55. A remedy is to start taking out the 25% tax free lump sum at 55 and then income whenever the reduction in annual pension contribution allowance will not be a problem. A person who is in capped drawdown or starts to be before 6 April 2015 can also take out the GAD limit amount of income each year without triggering the annual allowance reduction. All of these things in effect just transfer the ongoing growth to investments outside the pension not subject to the LTA, instead of leaving the growth inside and subject to it.