Lifetime Allowance Protection - Where to enter your client's eligibility for LTA protection **AdviserGo, UK**

To model cases where a client is eligible for lifetime allowance (LTA) protection, you can override the normal LTA assumptions using special settings on the Carryover Assumptions section in the Dashboard.

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Select the person to whom LTA protection will apply.

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Expand Pension Lifetime Allowance to model fixed, individual, primary or enhanced protection or to simply set the future LTA to an inflated amount.

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To model fixed LTA protection: 

Select Fixed.

Complete the Year Claimed, Protection Amount, Protected Tax-Free Cash and Tax-Free Cash Already Taken (if applicable) fields. 

Note: After applying for fixed protection, your client would normally be restricted from making further pension contributions. Furthermore, the accrual of any active final salaries schemes for that person would also end with the application of fixed protection. Note that the software does not enforce this rule so to model fixed protection appropriately, in most cases, be sure to remove employee and employer contributions to any money purchases and any further accrual of final schemes, unless exceptions apply.

 

To model individual LTA protection

Follow the same steps outlined above for modelling fixed protection.

Unlike fixed protection, persons who have applied for individual protection could make further contributions to their pensions and their final salary schemes could continue to accrue. Since the software does not impose contribution and accrual restrictions in any case, simply leave any planned contributions or accrual rates in place or add them, if applicable. 

 

To model enhanced LTA protection: 

Select Enhanced.

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No test will occur against the lifetime allowance and there should never be a lifetime allowance charge payable by clients eligible for enhanced protection. The assumption is, however, that only the regular level of tax free cash will be available when the pension is crystallised.

So in theory, if a client has enhanced protection and a pension fund of £2,000,000, no LTA overage charges would apply, no matter what the future balance of the pension becomes, but at current levels in 2020/21 (LTA £1,073,100), the client would only be eligible for tax free cash withdrawals of up to

£268,275.  The tax free cash allowance is being escalated based on CPI from 2018 onward. 

 

To model primary LTA protection: 

Select Primary and enter in the Protection Amount field the amount protected. 

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For Primary Protection, a lifetime allowance factor is calculated at the time of protection and this factor is applied to whatever lifetime allowance is in effect at the time of crystallization. 

For example, if protection was granted in the amount of £1,500,000 when the current LTA is £1,073,100 (2020) then the protected LTA factor is 1,500,000 / 1,073,100 which equals 1.40. When funds are crystallized at a later date, this factor is multiplied by the LTA in effect at the later date to determine the protected LTA. For example, the future lifetime allowance has escalated to £1,200,000, which would result in a protected LTA of £1,200,000 X 1.4  = £1,680,000.

 

LTA protection and indexation of the future Lifetime Allowance

The standard lifetime allowance indexes with CPI from 2018 onward. Once the protected lifetime allowance falls below the indexed standard allowance, the standard allowance (being the higher of the two) will be applied.

The 25% in eligible tax free cash withdrawals is also escalated at this rate and in accordance with these rules. 

 

Lifetime allowance checks on final salary pensions

LTA protection also applies to defined benefit schemes. 

The lifetime allowance check against final salaries is calculated by multiplying the projected final salary payment upon commencement by 20. This test is taken into account together with the crystallisation of money purchases. 

If the lifetime allowance is breached, the tax on any overage is normally either deducted from the money purchase (or in some cases from drawdown pensions at age 75) or if the overage is the result of a final salary benefit, the tax may be charged to the client as a one-off expense. 

 

LTA Tests - Setting final salary benefits to be crystallised before money purchases

If in a given year the lifetime allowance test is being performed on a combination final salary schemes and money purchases and you would prefer the final salary tests to be performed first, a preference is available in Dashboard > Plan Settings Expand Calculation Settings and toggle to 'YES'  Crystallise Final Salary before Money Purchase

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Related topics

Preferences - Default Inflation / Growth Rates - Default Tax Table Assumptions