Lifetime Allowance 2012 Explained

Lifetime Allowance 2012 Explained

The Treasury has confirmed new legislation with effect from 2012 for changes to Pension Lifetime Allowances, the maximum value of pension funds that you take in your lifetime.

The Lifetime Allowance April 2012 – reduced to £1.5m from £1.8m
This is a calculation done when you take pension benefits e.g. retire and buy an annuity, release a tax free lump sum or take pension drawdown.

Example: Mr Smith in planning to retire in this next 2 yrs. He has:

A Sipp Valued at £200,000
A Company Money Purchase Valued at £550,000
A Final Salary Pension with accrued pension benefit of £50,000 pa.

Retiring before April 2012 - Lifetime Allowance Calculation (assuming no further growth)

Investment Linked Pensions Total = £200,000 + £550,000 = £750,000
Final Salary Pension Valuation = £50,000 pa X 20 = £1,000,000
Total Pension Valuation for Lifetime Allowance = £1,750,000
Lower than £1.8m = no tax charge

Retiring after April 2012 - Lifetime Allowance Calculation (assuming no further growth)

Investment Linked Pensions Total = £200,000 + £550,000 = £750,000
Final Salary Pension Valuation = £50,000 pa X 20 = £1,000,000
Total Pension Valuation for Lifetime Allowance = £1,750,000
Pension Valuation Higher than new £1.5m Lifetime Allowance = Tax Charge Applies UNLESS YOU HAVE APPLIED FOR FIXED PROTECTION of your Lifetime Allowance

Pension Contributions After Age 75
Pension contributions after age 75 will not receive tax relief and will be a test against the Lifetime Allowance at age 75 regardless of whether pension benefits have been crystallised at that point.

Conclusion
Mr Smith should retire before 2012.

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