Pension Lifetime Allowance 2014

Budget Dec 2012 - Pension Lifetime Allowance 2014

The Lifetime Allowance is the maximum you can have paid into all pension schemes overall in your lifetime.  Currently, unless you have special protection, your lifetime allowance is £1.5m.  This used to be £1.8m but was reduced two years ago.

The lifetime allowance for pensions is reducing to £1.25m in April 2014.  What does this mean?

For most workers, the lifetime allowance whether it is £1.5m of £1.25m will not affect us.  But it will affect higher earners or those in salary related pensions e.g.  civil service and public sector workers.  

For High Earners, this may have a serious impact

Example: Mr Jones in planning to retire in this next 2 yrs (Dec 2014).  He has:

• A Sipp Valued at £300,000
• A Company Money Purchase Pension Valued at £400,000
• A Final Salary Pension with accrued pension benefit of £30,000 pa.

Retiring before April 2014 - Lifetime Allowance Calculation (assuming no further growth)

• Investment Linked Pensions Total = £300,000 + £400,000 = £700,000
• Final Salary Pension Valuation = £30,000 pa X 20 (valuation factor) = £600,000 deemed value for lifetime allowance
• Total Pension Valuation for Lifetime Allowance = £700,000 + £600,000 = £1.3m
• This is lower than the current lifetime allowance of £1.5m = no tax charge

Retiring after April 2014 - Lifetime Allowance Calculation (assuming no further growth)

• Investment Linked Pensions Total = £300,000 + £400,000 = £700,000
• Final Salary Pension Valuation = £30,000 pa X 20 (valuation factor) = £600,000 deemed value for lifetime allowance
• Total Pension Valuation for Lifetime Allowance = £700,000 + £600,000 = £1.3m
• Lifetime Allowance now £1.25m.  Mr Jones is £50,000 over the limit.
• He theoretically would faces a tax charge on £50,000.
• He will be able to protect this limit by applying for Fixed Protection.

Personalised Protection of the Lifetime Allowance - 2014 Fixed Protection

Any person who is already above the 1.25m lifetime allowance will be allowed to fix their lifetime allowance at £1.5m, meaning no tax charge, provided

1. No further pension payments are made into money purchase, investment linked pensions
2. No increases in benefits to defined benefit, final salary or career average salary pensions schemes apart from ‘relevant percentage’ i.e.  any usual inflationary linked increases

Back to UK Budget December 2012 Summary