Healthcare news - Autumn 2021
In Autumn’s healthcare update, we have a look into annual allowance, the frequently asked questions around this subject and what the recent increased CPI inflation rate means for NHS pensions and tax.
FAQs about Lifetime Allowance
The big change recently is that the LTA will no longer receive inflationary increases until 2026. While this announcement may not create an immediate tax charge, it may cause many more people to exceed the LTA in the future.
The LTA is levied at 55% on lump sums and 25% on payments in any other way (for example pension payments or cash withdrawals).
There is a joint and several liability for a lifetime allowance charge between the scheme administrator and the member. The LTA tax charge arises on a ‘benefits crystallisation event’, which usually requires some action by the individual beneficiary (for example to designate funds for drawdown, or to take an annuity). It is the scheme administrator who must determine whether a charge arises on a benefit crystallisation event, and the responsibility for paying the charge is a joint one (although in cases of death benefit, or where there is a payment to a dependent or beneficiary, the liability can pass to the recipient). Where the liability is paid from the scheme (by the scheme administrator), this will reduce the assets in the scheme available to pay benefits at a future date.
Key Tips:
When you take benefits from your pension, they use up a percentage of the LTA at that time. For example, if you took £150,000 of benefits back when the Lifetime Allowance was £1.5million, this would have used 10% of your Lifetime Allowance. You should therefore have 90% of the current LTA remaining today (90% of £1,073,100 = £965,790).
Anyone whose benefits could increase above £1million could be affected. This includes:
There are ways that you can reduce your LTA tax liabilities, but there is no one-size-fits-all solution. The right course of action depends on your circumstances and the type of pensions you have. Some options could include:
The pension scheme will normally pay a tax charge on your behalf. It will then reduce the benefits in payment to you. The tax charge to pay will depend if the benefits crystallisation event is the withdrawal of a lump sum (a 55% charge) or otherwise (a 25% charge).
Defined Contribution pensions (e.g. pot of invested money) are the easiest to value – it is just the value of the underlying investments. E.g. £100k of defined contribution pension investments represents £100k against of the LTA.
Defined Benefit schemes (Final Salary/Career Average/Scheme Pensions such as the NHS Pension Scheme), which offer a promise of income from a certain age are valued as 20x the income payable, plus any tax-free cash. For example, if a pension paid £10k per annum plus a £30k tax-free lump sum on retirement, this would be valued as £10k x 20 + £30k = £230k.
Key Tips:
Whatever happens, your pensions will be tested against the LTA. If you use drawdown, your benefits will be tested twice, first when you access them and then at the of age 75 or earlier death. It is vital then that you continue monitoring your pensions against the LTA and plan your income accordingly.
If you have any further questions about the change and impact on your pension, please get in touch today via the button below.
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