LIFETIME ALLOWANCES PENSION: There are ways to protect your pension pot from certain reductions to the lifetime allowance.
Pension Lifetime Allowance Check
Your pension provider can tell you how much of the standard lifetime allowance you have used.
What if you belong to more than one type of pension scheme? In this case you must add up the allowance used in all the pension schemes that you belong to.
There are several different pension types on the market in the United Kingdom. The type of pension pot owned determines what counts towards the standard lifetime allowance.
- Defined Contribution (e.g. personal, stakeholder and most workplace schemes). Money in pension pots that goes towards paying you, however you decide to take the money, counts towards your lifetime allowance.
- Defined Benefit (e.g. some workplace schemes). Usually 20 times the pension you get in the first year plus your lump sum counts towards your lifetime allowance. Check with your pension provider.
You may need to provide your pension provider with information about other pension schemes you are in. They may need it to check whether you go above the standard lifetime allowance when:
- You start taking money from your pension pot
- You transfer a pension overseas.
- You reach the age of 75.
Tax Charge for Exceeding Lifetime Allowance
Your pension provider will send you a statement to inform you if it goes above the lifetime allowance. They will deduct the tax before you start to receive your pension.
You must report any deducted tax using a Self Assessment tax return. If you use paper forms you will need to use Form SA101. Your pension provider will give you help and information on this part of the process.
Note: What would happen if you die before you can take your pension? HM Revenue and Customs would send a bill to the person inheriting a pension to get the tax from them.
There are several ways to get the money paid to you. This will determine the rate of tax paid on pension savings above the lifetime allowance. The tax rates are:
- 55% if the money gets paid as a lump sum.
- 25% if the money gets paid in any other way (e.g. cash withdrawals or pension payments).
How to Protect Pension Lifetime Allowance
The standard lifetime allowance reduced to 1.25 million on in April 2014. It then reduced even further to 1 million on the 6th of April 2016. Read the government publication ‘Pension schemes: protect your lifetime allowance‘ for ways to protect your pension(s) from these reductions.
Note: Give your pension provider the type of protection and the protection reference number when you take money from the pension pot.
Cash Withdrawals from a Pension Pot
In some cases, you cannot withdraw cash from a defined contribution pension pot ‘uncrystallised funds pension lump sums’ such as when:
- You have primary or enhanced protection covering a lump sum worth more than £375,000.
- You have ‘lifetime allowance enhancement factor’ if your unused lifetime allowance is less than 25% of the cash you want to withdraw.
Reporting Changes to HM Revenue and Customs
You must report certain changes to HMRC either online or by postal methods. This is because the loss of enhanced protection (or any type of fixed protection) can happen if:
- New savings get made into a pension scheme.
- The policy owner enrolls in a new workplace pension scheme.
- Money gets transferred between pension schemes in a way that breaches pension transfer rules.
- You have enhanced protection and, when taking pension benefits, their value increases more than the amount allowed in the enhanced protection tax rules. This occurrence is also called ‘relevant benefit accrual’.
- You have fixed protection and the value of the pension pot in any tax year grows at a higher rate than is allowed by the tax rules. This occurrence is also called ‘benefit accrual’.
Your employer will know whether they plan to enrol you in a workplace pension. Thus, to help ensure you do not lose pension protection, you can either:
- Request not to get enrolled in some schemes. Employers may need some evidence of the lifetime allowance protection.
- Choose to opt out of the scheme (within one month).
Note: Inform HM Revenue and Customs any time you think you might have lost pension protection.
The Right to take a Pension before 50
Some policy owners have a reduced lifetime allowance. That means they have the right to take their pension before 50. In most cases it was a pension scheme they joined before 2006.
But, it only applies to people in certain types of jobs (e.g. dancing, football, and other professional sports). They are likely to start taking their pension before they reach 55 years old.
strong>Note: There is a list of members with protected pension ages who do not get a reduction in lifetime allowance. They include pension schemes for uniformed services (e.g. the police, armed forces, and fire services).