The Lifetime Allowance
Members coming up to retirement will have been asked to complete a questionnaire to help calculate the amount of their Lifetime Allowance they have used in taking their pension.
The Lifetime Allowance was introduced in 2006 by HM Revenue and Customs (HMRC) to regulate the total amount of private pension savings which a person can build up before additional taxes are paid. For most people their total lifetime savings will not exceed the Lifetime Allowance, which is currently just over £1m, and is normally raised in line with inflation every year.
In order to calculate the amount of a person’s lifetime pension savings, their defined benefit pensions must be added to any defined contribution pensions. These terms are explained below.
Defined benefit pensions are usually workplace pensions where the amount you receive on retirement is known in advance – either a fixed pension (like the Nottinghamshire & District Miners’ Pension Scheme 1939) or a proportion of your salary from your employment (like the Mineworkers’ Pension Scheme, for example). These types of scheme don’t have a straightforward “value” as there is no pot of money belonging to any one individual, so HMRC calculates the value of your pension as twenty times its annual amount.
• So for example, if your Notts Miners’ pension is £22.20pw, then its value for calculating the Lifetime Allowance is £22.20 x 52 weeks x 20 = £ 23,088.
Defined contribution pensions can be workplace pensions or personal pensions where the pension you receive is based on the value of the pot you accumulate from yours and any employer contributions, plus the return the fund makes over your working lifetime. For the purposes of calculating the Lifetime Allowance, the value of a defined contribution pension is simply the value of the pot when you come to retire.
The Lifetime Allowance test is carried out whenever benefits come into payment, usually at retirement. So, if you have several pensions the test is taken as each one comes into payment and the percentage of the Lifetime Allowance that is used up is recorded. For example, if you have a workplace pension starting at age 60, you might use up 20% of your allowance at that time. If you then draw a private pension at say, 65, then the private pension provider will take a note that you have used up 20% and that you have 80% left. You would need to provide that information to each pension provider when you come to draw your pension.
Please note that the State Pension is not considered in these calculations, it does not count towards the Lifetime Allowance. Nor do private savings which are not pension arrangements, such as ISAs – it only applies to workplace or private pensions which you (and your employer where relevant) paid into.
For people with very substantial pension savings, or long service in a generous workplace pension, then they might use up all the Lifetime Allowance. If this happens, then a special tax charge will be taken from the excess over the Lifetime Allowance, of 55% if taken as a cash sum, or 25% if taken as additional pension.
As stated above, for most savers, the chance of exceeding the Lifetime Allowance is, for now, quite small.
However, we are obliged to check that when we put your Nottinghamshire and District Miners’ Pension Scheme 1939 benefit into payment, you have not exceeded the Lifetime Allowance, so please help us by completing the form you will have been sent when you come up to age 60. This gives us information to make sure that you have no special circumstances and that we know the value of any other pensions you are already receiving – provided that all checks out, there will be no delay and no taxes to pay (other than normal PAYE tax) on your pension.
