This is for financial adviser use only and shouldn’t be relied upon by any other person.

LIFETIME ALLOWANCE MASTER-CLASS

LEARNING OBJECTIVES

This session will cover:

• Why it’s important for advisers to understand the lifetime allowance (LTA).

• How the LTA works, the tax charge and the various protections available.

• Some practical aspects around how the charge is paid.

• Case studies around the LTA and paying the charge.

“... so that everyone contributes their fair share to reducing the

deficit…”

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Source: Royal London & Budget 2015

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LTA HISTORICALLY

HOW MUCH TAX THE LTA HAS RAISED

LTA receipts

2006/07 2016/17

£5m £102m

A 2,000% increase in 10 years

STEVE WEBB POLICY PAPER FINDINGS

• LTA now 40 times average wage (80 times in 2010).

• 290k individuals have funds in excess of LTA.

• Estimated to be as much as 5 times this in future.

• Very few opted for protection.

ESSENTIAL INFORMATION

BENEFIT CRYSTALLISATION EVENTS (BCEs)

Designating funds for drawdown

Entitlement to scheme pension

Increase to scheme pension in payment

Purchase of a lifetime annuity

Reaching age 75 Relevant lump sums

Relevant lump sum death benefits

Transfer to QROPS Prescribed authorised

member payments

LTA VALUATION

• Defined Benefit (DB) schemes - 20 x the first year’s payment* + any lump sum.

• Uncrystallised defined contribution (DC) schemes valued against fund value.

• Pre A-Day pensions in payment - 25 x pension at time of first BCE.

• Value of any growth in drawdown from crystallisation to age 75.

* Schemes might have a different relevant valuation factor.

PROTECTION

LTA PROTECTION

“... so that everyone contributes their fair share to reducing the

deficit…”

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Source: Royal London & Budget 2015

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Enhanced

Primary IP 2014

FP 2014

IP 2016

FP 2016 FP 2012

LTA PROTECTION

Fixed Protection 2016

• Keeps LTA at £1.25 million from 06/04/2016.

• Available to anyone who doesn’t have Primary,

Enhanced or Fixed 2012/2014.

• Lost if contributions made or further accrual

above the ‘relevant percentage’ occurs.

• Can be held in conjunction with Individual

Protection 2016.

Individual Protection 2016

• Must have pension savings of more than £1m at

05/04/2016.

• Protects members LTA at pot level subject to

maximum of £1.25m.

• Can continue with pension contributions.

• Unavailable in conjunction with Primary

Protection or IP 2014.

FIXED PROTECTION

Example 1

• Fund value of £1.2m at 5

April 2016.

• Applied for FP2016.

• No further contributions

made.

• £300k investment growth

to BCE.

1

1.25

1.5

£m

Growth to BCE

FP2016

5 April 2016

£250,000 chargeable

£1.25m protected

FIXED AND INDIVIDUAL PROTECTION

Example 2

• Fund value of £1.2m at 5

April 2016.

• Applied for FP & IP 2016.

• Poor investment

performance.

• Fund value drops to

£1.1m. 1

1.25

1.5

£m FP2016

5 April 2016 £1.1m

at BCE

FP LOST

£1.2m protected

Payments made

LTA PROTECTION

FP2016 suitable where:

• Fund value likely to exceed LTA in future

• Even without further contributions

IP2016 suitable where:

• Fund value is more than £1m on 5 April 2016

• Might want to make more payments

• Employer only payments

LOSING FIXED PROTECTION

• Benefit accrual.

• Impermissible transfer.

• Auto enrolment – employer can choose not to auto enrol affected workers.

LOSING FIXED PROTECTION

BUT…

• A recent first tier tribunal directed an individual’s protection be reinstated after a mistake.

• Watch this space!

PRACTICAL ASPECTS

LTA ADMINISTRATION

• At each BCE the provider will give the member a statement

confirming how much LTA has been used.

• The provider will also ask how much has been used up by previous

BCEs.

• Expressed as a percentage of the standard LTA at the time of the

BCE.

• Could be different depending on the type of protection.

HOW IS THE CHARGE PAID?

During the lifetime of the member:

• The administrator deducts the charge from the member’s fund/benefits and passes to HMRC.

• Same at age 75.

• The member will decide the order if the BCEs occur on the same day.

HOW IS THE CHARGE PAID?

On death of the member:

• The full benefit is paid to the beneficiary (ies).

• The PRs calculate the chargeable amount.

• HMRC assess the beneficiary (ies).

LTA CHARGE WHICH OPTION IS BETTER?

25% if taken as income or 55% if taken as cash:

From a tax point of view…

• Basic rate taxpayer would be better off with 25% LAC plus income tax.

• Higher rate taxpayer is neutral.

• Additional rate taxpayer would be better off with 55% LAC.

LTA CHARGE WHICH OPTION IS BETTER ON £10,000

25% LAC plus income tax

55%

Basic rate £4,000 £5,500

Higher rate £5,500 £5,500

Additional rate £5,875 £5,500

CASE STUDIES

MEET HEATHER

• Heather is 65.

• Her total pension savings

amount to £1.5m.

• She has no protection and has

not crystallised anything so far.

What are her options?

LTA OPTIONS

Options when LTA exceeded:

1 Take all the excess as cash @ 55% LAC

Take all the excess as income @ 25% LAC

Don’t touch the excess yet – no immediate LAC

Do nothing until LTA test forced

2

4

3

Take all the excess as cash @ 55% LAC

£1,500,000

£1,055,000 £445,000

-55% £244,750k

£263,750 PCLS

£791,250

£200,250 £791,250

Taxed as income

OPTION ONE

£1,500,000

£1,055,000 £445,000

-25% £111,250k

£263,750k PCLS

£791,250

£333,750

£1,125,000

Taxed as income

OPTION TWO

Take all the excess as income @ 25% LAC

£1,500,000

£1,055,000 £445,000

£263,750 PCLS

£791,250

LTA test at next BCE or age 75

Any growth increases LTA charge

Taxed as income

OPTION THREE

Don’t touch the excess yet – no immediate LAC

£1,500,000

Tested at age 75 against full fund including any growth

OPTION FOUR

Do nothing until LTA test forced

LTA OPTIONS

• When a member reaches age 75.

• BCE 5, 5A or 5B trigger another LTA test.

BCE 5 All or part of DB entitlement not

taken

BCE 5A Drawdown or

flexi access drawdown

BCE 5B Unused funds in

a money purchase scheme

£60k x 20 = £1.2m Minus LTA £1.055m Chargeable = £145k

LTA OPTIONS

Example 1 – BCE 5

• Member reaches 75 with unused DB benefit of £60k.

LTA OPTIONS

Example 2 – BCE 5A

• Member takes PCLS only from a £1.055m fund at age 65 (£263.75k).

• Remaining fund value has increased from £791.25k to £1.1m at age 75.

Value at 75 = £1.1m minus £791.25k Chargeable = £308.75k

LTA OPTIONS

Example 3 – BCE 5B

• Member has a £2m money purchase fund at age 73 and hasn’t

taken any benefits yet

• Crystallises £800k, taking £200k PCLS and designating £600k to

drawdown…

• …using up 75.83% of the Lifetime Allowance.

• And leaving a fund of £1.2m.

LTA OPTIONS

Example 3 – BCE 5B

• Member reaches age 75, triggering BCE 5B.

• Assuming no growth on drawdown or remaining fund.

Value at 75 = £1.2m minus 24.17% of remaining lifetime allowance = £255k Chargeable @ 25% = £945k Remaining fund (£1.2m - £236.25k) =£963.75k

LTA OPTIONS

Example 3 – BCE 5B

• Member decides to crystallise remaining £963.75k age 77.

• No further BCE is triggered.

• BCE 5B ignored for PCLS purposes.

Max PCLS allowed = £263.75k Minus PCLS taken at age 73 = £200k

PCLS available at age 77 = £63.75k

ORDER OF TAKING BENEFITS MEET DAVID

• David is 59 and plans to retire at 60.

• He has a DC plan worth £400,000 and a DB due to pay £40,000

pension plus £120,000 PCLS at 60.

• Has no protection and has not crystallised anything so far.

• Is the order of taking benefits important?

ORDER OF TAKING BENEFITS

• Total benefits are worth £1,320,000.

• The order is important as the charge will either be paid under the

DB or DC system.

• Which is the better option?

• A reduced guaranteed pension or a reduced DC fund?

• Charge due is £265,000.

• The better option will depend on his circumstances and by how much the

DB pension would be reduced.

THE TAX CHARGE MEET EMMA

THE TAX CHARGE MEET EMMA

THE TAX CHARGE MEET EMMA

Before and after protection

Before After

PCLS £190,480.25 £225,687.50

Charge £1,368,373.40 £1,290,987.50

Residual fund

£571,440.75 £677,062.50

LEARNING OBJECTIVES

At the end of this session you’ll have an understanding of how to:

• Evaluate the impact the LTA may have on your clients’ pension planning.

• Evaluate the impact the LTA may have on the benefits available on your clients’ death.

• Explain to clients how the LTA may affect their pension planning and what steps they may be able to take to reduce or eliminate the impact.

• Estimate the likely LTA charge on taking benefits or on death.

MORE LTA SUPPORT

• This webinar recording

• Further LTA webinar

• Steve Webb’s policy paper

• Technical Central articles and case studies

IMPORTANT INFORMATION

We’re happy to provide your documents in a different format, such as Braille, large print or audio, just ask us when you get in touch. All of our printed products are produced on stock which is from FSC® certified forests.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales, company number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.

Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in England and Wales company number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL.

June 2019 CAT CODE

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