Value of payouts from pension schemes

The lifetime allowance is a limit on the value of payouts from your pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge.

The lifetime allowance for most people is £1m in the tax year 2016/17.

It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.

From 6 April 2018, the standard Lifetime Allowance will be indexed annually in line with the Consumer Prices Index (CPI).

Protecting your lifetime allowance
If your total pension savings exceeded £1m on 5 April 2016, you may be able to apply for protection under the Individual Protection 2016 and Fixed Protection 2016 schemes.

For those who had a total pension savings that exceeded £1.25m on 5 April 2014 (before the threshold reduced), you may be able to apply for protection under the Individual Protection 2014 and Fixed Protection 2014 schemes. You have until 5 April 2017 to submit your application to Her Majesty’s Revenue & Customs (HMRC) for these schemes.

Working out if this applies to you
Every time a payout from your pension schemes starts, its value is compared against your remaining lifetime allowance to see if there is additional tax to pay.

You work out the value of pensions differently depending on the type of scheme you are in. For defined contribution pension schemes, including all personal pensions, the value of your benefits will be the value of your pension pot used to fund your retirement income and any lump sum.

For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension. In many schemes, you would only get a lump sum by giving up some pension, in which case the value of the full pension captures the full value of your payouts. So you are likely to be affected by the lifetime allowance in 2016/17 if you are on track for a final salary pension (with no separate lump sum) of more than £50,000 a year or a salary-related pension over £37,500, plus the maximum tax-free cash lump sum.

Note that certain tax-free lump sum benefits paid out to your survivors if you die before age 75 also use up lifetime allowance. Whenever you start taking money from your pension, a statement from your scheme should tell you how much of your lifetime allowance you are using up.

Source:  05/05/2016