Pensions in the UK receive generous tax reliefs, but there are some limitations. The Lifetime Allowance (LTA) is the maximum value of benefits which can be taken from registered pension schemes without incurring a special tax charge – known as the Lifetime Allowance tax charge.

The Lifetime AllowanceThe LTA is currently £1,073,100. However it has changed frequently since it was introduced in 2006 as shown below. The intention is it will increase in line with the Consumer Prices Index from 2018 onwards.

The Lifetime Allowance and Benefit Crystallisation Events

Lifetime Allowance testA test is carried out each time benefits are taken from a registered pension scheme to check if the LTA has been exceeded.

The special tax chargeIf the value of benefits exceeds 100% of the LTA, a lifetime allowance tax charge will be payable on the excess. This is currently 55% if the excess is taken as a lump sum. If the excess remains in the pension wrapper, an immediate tax charge of 25% is due and normal rules apply to any future pension withdrawals which are taxed as income under the Pay As You Earn system.

ProtectionWhen the LTA was introduced in 2006 the Government allowed people to apply for two types of protection – known as primary and enhanced protection – to enable people to protect their pension fund from the lifetime allowance charge. Further types of protection have been introduced as the LTA was reduced in 2012, 2014 and 2016. In essence, protection provides entitlement to a special personal lifetime allowance and means a member will pay no, or a lower, lifetime allowance tax charge than if they used the standard LTA.

Individuals with protection should have a certificate from HMRC detailing their personal arrangement.

Age 75If an individual doesn’t take their benefits until after age 75, then all uncrystallised funds are tested at age 75. When the individual takes their pension benefits in future (eg at age 80) there is no further check against the lifetime allowance. The only Benefit Crystallisation Event (BCE) that can occur after an individual’s 75th birthday is where a scheme pension in payments is increased beyond the permitted margin, through BCE3.

Technical Factsheet

For financial adviser use only

£1.75m

£1.8m £1.8m

£1.5m £1.5m

£1.25m

£1.25m

£1m£1m

£1.03m

£1.055m

£1.65m£1.6m

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

£1.0731m

2020

Benefit Crystallisation EventsEach time benefits are taken from a registered pension scheme a test is carried out to ensure the LTA hasn’t been exceeded, these are known as Benefit Crystallisation Events (BCEs) as shown below.

*Needs to be within 2 years of Scheme Administrator being informed of death.

An individual dies before age 75 and remaining uncrystallised funds are designated for dependant’s or nominee’s flexi-access drawdown*

Individual moves funds to provide a drawdown pension

The value of the amount moved into drawdown

Individual becomes entitled to a scheme pension before age 75

20 times the pension paid in the first year

An increase in a scheme pension exceeds a certain level

20 times the excess pension increase

Individual becomes entitled to a lifetime annuity

The value used to buy the annuity (less any amounts previously crystallised under BCE1 if funds are coming from a drawdown arrangement)

An individual reaches age 75 and has not taken all of their benefits under a defined benefit scheme

20 times the pension, plus any separate lump sum, as if these benefits were taken at age 75

An individual with drawdown pension funds reaches age 75

The value of the drawdown less any amounts previously crystallised under BCE1

An individual reaches age 75 with uncrystallised funds in a money purchase arrangement

The value of the uncrystallised funds

The value of the amount moved into drawdown

An individual dies before age 75 and remaining uncrystallised funds are used to buy a dependant’s or nominee’s annuity*

The value used to buy the annuity

Payment of a relevant lump sum before age 75 (eg tax-free lump sum)

The amount of the lump sum

Payment of a lump sum death benefit where individual dies before age 75

The amount of the death benefit

Transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS)

The amount transferred (less any amounts previously crystallised under BCE1 if funds are coming from a drawdown arrangement)

Any other event prescribed in regulations. Currently includes certain payments made (arrears after death, pension errors)

Depends on event

BCE What and when Amount measured against LTA

1

2

3

4

5

5a

5b

5c

5d

6

7

8

9

October 2006 December 2010

Meet Meredith

Meet Mike

Taking benefits at different timesThe position is more complicated where people take benefits in different tax years when the LTA is different. Each time a BCE occurs, some of the individual’s lifetime allowance is used up, leaving less lifetime allowance available for use in the future. Each BCE is measured as a percentage of the LTA in that year.

Mike crystallises his benefits in October 2006 with a capital value of £150,000. The LTA at that time is £1.5m. The percentage of the LTA used is 10% {£150,000/£1.5m}. So Mike has 90% of his LTA still available.

In December 2010, Mike crystallises a further £450,000 when the LTA is £1.8m. So Mike has used up a further 25% of the LTA {£450,000/£1.8m}.

In total he has used up 35% of his LTA.

An LTA available of £1.5m

An LTA available of £1.8m

Mike crystallises a further

£450,000

10% used

25% used

90% left 65% left

He crystallises £150,000 at

that time10% used

Case study

Meredith reaches age 65 with a pension pot of £200,000 when the LTA is £1m. She decides to take her maximum tax-free lump sum and uses the rest to buy a lifetime annuity.

An LTA check is triggered. There are two BCEs. £50,000 falls under BCE6 (the payment of a lump sum) and £150,000 falls under BCE4 (entitlement to a lifetime annuity).

Meredith has used up 20% of the LTA {(£50,000+£150,000)/£1m}.

BCE 6

BCE 4

£800,000LTA left

£200,000LTA used£150,000 used

to buy annuity

Payment of a relevant lump

sum before age 75 (eg tax-free

lump sum)

Individual becomes entitled

to a lifetime annuity

20% used

80% left£50,000 tax-free cash taken

Second check

If a BCE occurs and the funds in question have already been the subject of an LTA check, the amount crystallised at outset is taken into account. This concept prevents ‘double-counting’ and only growth is measured against the LTA on the second check.

Drawdown funds are subject to a further check at age 75 (BCE5a) which calculates the growth in the value of the benefits between entering drawdown and age 75. This growth will then be measured against the LTA.

If an individual had initially used drawdown then decided to use some of those funds to purchase a lifetime annuity at a later date (after age 75), the value measured against BCE4 is the amount used to buy the annuity less any amounts previously crystallised under BCE1.

Meet BrianBrian had a fund of £800,000 when he took benefits in 2007. At that point the LTA was £1.6m. He decides to take a tax-free lump sum of £200,000 (BCE6) and put the remaining £600,000 into drawdown (BCE1). Brian uses up 50% of his LTA.

In 2011 Brian decides to use his full drawdown pot, which has grown to £750,000, to buy a lifetime annuity. The LTA at this point is £1.8m.

The value measured against his LTA under BCE4 (entitlement to a lifetime annuity) is £750,000 less the amount previously crystallised when he entered drawdown (£600,000) which equals £150,000. This is measured against Brian’s LTA and uses up another 8.33%. Brian has used up 58.33% of his LTA.

2007 2011An LTA available of

£1.8m

He crystallises £150,000 at

that time

8.33% used

50% left41.67%

left

50% used50% used

An LTA available of £1.6m

He crystallises £800,000 at that

time

We also have “The Lifetime Allowance and The Retirement Account” factsheet available on our website. This provides examples of how utilising an annuity as an asset of a drawdown plan could save tax for those close to, or exceeding, their LTA.

To find out more you can contact us on 0800 912 9945 or alternatively email us at sales.ra@canada-life.co.uk

Information

2

BCE 6

BCE 1

Meet StanleyStanley aged 65, invests £400,000 in TRA in October 2016 when the LTA is £1m*. He

takes a tax-free lump sum of £100,000. With the remaining £300,000, Stanley uses

£120,000 to buy an annuity income and invests £180,000 in the drawdown element. The £100,000 tax-free lump sum is measured against the LTA through BCE6, and the

£300,000 is used to invest in annuity and/or drawdown within TRA and is measured

through BCE1. Stanley uses up 40% of his LTA.

Second LTA checkA further check may be required –• at age 75. This measures the growth in the value of the TRA arrangement, if any, between the individual entering TRA and age 75.

• if a lifetime annuity is bought outside of TRA before age 75. The valuation of most assets at age 75 is straightforward, being the market value of the asset. However for some assets the

valuation may be slightly more complex. TRA may hold an annuity as an asset. The valuation of the annuity at age 75 is the original

purchase price less the income paid up to the individual’s 75th birthday.Continuing the above example, Stanley invested £400,000 in TRA in October 2016 when the LTA was £1m*. He took a tax-free

lump sum of £100,000, used £120,000 to buy an annuity within TRA and invested £180,000 in the drawdown element. He used

up 40% of his LTA.10 years later Stanley reaches age 75, and still has money invested within the TRA arrangement. A valuation needs to take place to

determine if there has been any growth since he invested. How does this work?

This is valued as the initial amount invested (£120,000) less income (£6,000 for 10 years) =

The drawdown fund has grown to £300,000

Invested at age 65Valuation at age 75

The initial value invested was £300,000, so that means the growth is £60,000. This is measured against Stanley’s remaining LTA at that time.

C�e �udy

£600,000LTA left

£400,000LTA used

£120,000 used to buy annuity

£180,000 invested in drawdown

2016

An LTA available of £1million*

£100,000 tax-free lump sum takenPayment of a relevant lump sum before age 75 (eg tax-free lump sum)

Individual moves funds to provide a drawdown pension

40% used

60% left

Annuity £120,000

Drawdown £180,000 Drawdown

£300,000

£360,000

Annuity £60,000 TOTAL

This case study is for illustrative purposes only.

*LTA figure for 2016/17 tax year.

1

BCE 1

Pensions in the UK receive generous tax reliefs, but there are some limitations. The Lifetime Allowance (LTA) is the

maximum value of benefits which can be taken from registered pension schemes without incurring a special tax charge

– known as the lifetime allowance tax charge.

Our technical factsheet – The Lifetime Allowance and Benefit Crystallisation Events – gives details of how the LTA

works and the tests carried out each time benefits are taken from a registered pension scheme which are known as

Benefit Crystallisation Events.

This factsheet considers the interaction of the LTA with The Retirement Account. As The Retirement Account (TRA) is

legally a drawdown contract the LTA generally operates as it does for all other drawdown contracts.

What is TRA?

The Retirement Account combines Pension Savings (uncrystallised), Pension Drawdown, Guaranteed Annuity, and a

Cash Account all held within a single tax-advantaged wrapper written under Drawdown rules.

LTA check at outset

Individual moves funds to provide a drawdown pension

When an individual buys

TRA, any tax-free lump

sum taken is valued

using BCE6.

The amount used to purchase the

annuity and/or drawdown within

TRA is valued using BCE1 - as

TRA is legally a drawdown contract

with the annuity an asset of that

drawdown.

However, TRA is unique in that an annuity may be an asset of the drawdown and the following outlines how that works.

The Lifetime Allowance and The Retirement AccountTechnical Factsheet

For financial adviser use only

BCE 6Payment of a relevant lump

sum before age

75 (eg tax-free lump sum)

MONEY IN

CASH ACCOUNT

Employer & Client

Contributions – can be regular

(M,Q,A) or one-off

PENSION SAVINGS

Consolidate and accumulate

• Ability to phase retirement through

automated or drip-feed drawdown

• Access tax-free cash in one go or in stages

• Comprehensive investment choice

• Flexible death benefits

PENSION DRAWDOWN

PERS

ONAL

PEN

SION

PLA

N (S

IPP)

WRA

PPER

FLEXIBLE DRAWDOWN

Decumulate with flexibility

• Flexible withdrawals – regular

and/or lump sum (taxable)

• Same comprehensive

investment choice

• Flexible death benefits

GUARANTEED INCOME

Decumulate with certainty

• Guaranteed lifetime income

that can be purchased

seamlessly at any point

• Underwritten, competitive

rates with a range of flexible

death benefits

• Reinvest or defer guaranteed

income

Pension transfers – non-crystallised

Pension transfers -crystallised

CASH ACCOUNTCASH ACCOUNT

1

2

CLIENT PAYMENTTax-free cash

Taxable IncomeTaxable Income or lump sums

from investments

* Guaranteed income can be seamlessly reinvested in

Pension Drawdown through any of our investment solutions

or left in the cash account. No tax payable until the income is

paid out.

12

With guaranteed income, you can:-

Take income (taxable)

Reinvest income*

40-333 03/20D

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