Introduction

Pension savings are subject to a lifetime allowance (LTA). Additional tax charges are applied if the amount of benefits taken during the member’s lifetime, or paid on their death, exceeds their allowance. The LTA has been cut on several occasions and various forms of protection exist to offer savers the chance to keep a higher allowance in return for meeting certain criteria.

Advisers need to fully understand when and how benefits are tested against the LTA, as well as the different tax charges applicable, in order to help clients manage any potential tax on excess pension funds over the LTA.

This module should take around 60 minutes to complete. Once you have completed all the sections there is a short self-assessment quiz to check what you have learned and a CPD certificate for up to 60 minutes can be claimed.

Outcomes

On completion of this module you should be able to:

  1. Explain when benefits are tested against the lifetime allowance (LTA) and how different types of pension schemes are valued
  2. Determine when a LTA charge is payable and what tax rate applies
  3. Describe how some individuals can be fully or partially protected against an LTA tax charge and how LTA enhancement factors are applied

Post learning assessment

Question 1

Which of the following statements is INCORRECT about valuing pension benefits against the lifetime allowance (LTA)?

  1. The amount of the tax free cash sum paid is tested
  2. The amount of the fund used to buy an annuity is tested
  3. The amount of the fund designated to drawdown is tested
  4. The amount of the initial scheme pension paid x 30 is tested

Question 2

Which of the following scenarios would result in payment of a 25% LTA tax charge? Assume all pension pots are in excess of the LTA.

  1. Toby, 70, who retires to France and transfers his uncrystallised pension pot to a French QROPS
  2. Martina, 34, who inherits her late father’s uncrystallised SIPP. She chooses to go into beneficiary’s drawdown within 2 years of death
  3. Bridget, 62, buys a lifetime annuity with her remaining uncrystallised pot
  4. All of the above

Question 3

Alison was an active member of her employer’s defined benefit pension scheme until she changed jobs in September 2019. Her DB scheme benefits at 5 April 2018 were a CETV of £1.28M, based on having a yearly DB scheme pension entitlement of £32,000. She has no other pension savings.

What is Alison’s position in relation to LTA transitional protection?

  1. Alison qualifies for individual protection 2016, as her CETV is over £1M, so can get a protected LTA of £1.28M
  2. Alison qualifies for fixed protection 2016 as she was a member of a scheme on 5 April 2016, so can get a protected LTA of £1.25M
  3. Alison does not qualify for any protection. She’s had new benefit accrual after 5 April 2016 and her DB benefits would have been valued at less than £1M based on scheme pension entitlement
  4. Alison qualifies for individual protection 2016, as her CETV is over £1M, so can get a protected LTA, capped at £1.25M

Check your answers

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