Lifetime allowance - basic questions

Marine_life

I have a couple of questions on lifetime allowance which I believe we might have exceeded.

1. Am I right in thinking that in respect of defined benefit pensions the lifetime allowance is calculated as 20 times the amounts due?

2. If those pensions are from overseas employers then those amounts are also included for UK tax purposes?

3. When is the tax actually due? I have read that it is 25% but does that only apply to the excess over the lifetime allowance?

hugheskevi

1. Am I right in thinking that in respect of defined benefit pensions the lifetime allowance is calculated as 20 times the amounts due?

Yes, plus the amount of any automatic lump sum.

Note it is the actual value of the pension put into payment which is used, so early commencement with actuarial reduction will reduce the HMRC Lifetime Allowance valuation and the amount of a breach.

2. If those pensions are from overseas employers then those amounts are also included for UK tax purposes?

If it is a UK registered pension scheme it doesn't matter if it is an overseas employer.

3. When is the tax actually due? I have read that it is 25% but does that only apply to the excess over the lifetime allowance?

When the pension is crystallised - which is usually when you commence it, but also events such as death. See this link for list of crystallisation events.

The charge is only calculated on excess over lifetime allowance (check if Individual Protection 2016 could be of any use to you).

If the pension crystallising over the Lifetime Allowance relates to income (ie it will be subject to income tax) the charge is 25% of the excess over the available Lifetime Allowance. So, for example, if you crystallised £1.23m and the LTA is £1.03m there would be £200,000 of excess over LTA. If this is income it would lead to a charge of £50,000 (25% of £200,000) which could be paid by reducing the pension. If the scheme commutation rate for LTA charge was 20:1 a reduction of £2,500 to the pension could be made and the scheme would pay the LTA charge to HMRC.

If the crystallising pension is lump sum (ie not subject to income tax) the charge works in the same way, but is 55% rather than 25%.

EdSwippet

hugheskevi wrote: »

Note it is the actual value of the pension put into payment which is used, so early commencement with actuarial reduction will reduce the HMRC Lifetime Allowance valuation and the amount of a breach.

Translation: the risk of exceeding the LTA potentially motivates retirement earlier than planned.

hugheskevi wrote: »

If it is a UK registered pension scheme it doesn't matter if it is an overseas employer.

Right. If a foreign pension contains no UK tax relieved money, though, it does not count towards the LTA:

For example, if a member of a non-UK registered scheme has no UK-relieved funds, they will not be liable to the lifetime allowance charge and the scheme administrator doesn’t need to give that member a BCE statement (a statement setting out how much lifetime allowance has been used up by a benefit crystallisation event, see PTM164400) when they crystallise benefits under the scheme.

This might mean you could hold say $10MM in a US 401k or a Canadian RRSP and £1MM in a UK pension and still not breach the LTA.

There may be some other countries that have something as dumb as the LTA for pensions on the books, but I haven't come across any. The US does force 'required minimum distributions' after age 70.5 though, and that has some of the same effect.

Marine_life

Thank you both - that's really important as the biggest chunk is in a German pension scheme so outside the UK scope of reference it seems.