Lifetime Allowance reduction – how this will affect Teachers’ Pension Scheme members

The Lifetime Allowance (LTA) reduction to £1m(*) – how will this impact me as a member of the Teacher’s Pension Scheme (TPS)?

The Lifetime Allowance is the total value of any pension savings that you can have at retirement without incurring a tax charge. The total amount that you need to consider includes your pension savings from all your pension schemes, but excludes your state pension. Your pension savings are compared against the LTA every time that any of your pension schemes make payments to you.

If the value of your accrued benefits in the Teachers’ Pension Scheme and other arrangements exceeds £1 million, you may be subject to an Lifetime Allowance (LTA) charge. Members of TPS with a current LTA value of benefits around 80% of the LTA of £1 million are particularly at risk of incurring an LTA charge, to which they would not previously have been subject when the LTA was set at higher levels.

To value your Teachers’ Pension Scheme benefits against the LTA you should multiply by 20 every £1 of annual pension that will come into payment. You then need to add the value of any retirement lump sum to this capitalised value. Follow this example for more information:

Example

A member with a pension of £50,000 per annum and an automatic lump sum of £150,000 would have their benefits valued against the LTA as follows:

Value of pension: £50,000 per annum x 20 = £1,000,000 (A)

Value of lump sum: £150,000 (B)

Total value of benefits: £1,150,000 (A+B)

This would represent a value of 115.00% of the LTA where the LTA is £1 million. The amount by which the benefits exceed the LTA, or protected LTA, is known as the “chargeable excess”.

The Teachers’ Pension Scheme does not permit the “chargeable excess” to be paid as a LTA Excess Lump Sum. If it was paid as a lump sum then it would be taxable at 55%.

In the example above, the value of benefits in excess of the LTA is £150,000. This will be paid as pension and thereby subject to a tax rate on the excess of 25%. The member and the scheme are jointly and severally liable for the LTA charge. The charge is paid by the Teachers’ Pension Scheme to HM Revenue and Customs (HMRC). The member’s pension is then reduced to recover (in instalments) the charge paid by the Scheme.

Can I protect my pension from an LTA charge?

It’s sometimes possible to protect yourself from LTA charges but the protection rules are complicated. You should consider if you need professional financial advice before deciding whether to apply for protection and when to take your benefits as the TPS cannot offer advice. You can also find out more about how the Lifetime Allowance works via the HMRC website. There is a tool on their website that can help you decide whether to apply for protection:

https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance

If you wish to discuss this further, please contact Brian Laidlaw at brian.laidlaw@taitwalker.co.uk.

(*)From the 2018-2019 tax year the LTA will increase annually by the Consumer Prices Index (CPI).

Tait Walker Wealth Management is a trading style of Tait Walker Financial Services Limited which is authorised and regulated by the Financial Conduct Authority.

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