There is a limit on the total value of funds or benefits at retirement from all pension sources called the lifetime allowance, each individual has a maximum permitted tax-exempt fund which is £1.5 million for the 2006/07 tax year, this will increase on a fixed scale as follows for the next 4 years:
2007/08 £1.6 million
2008/09 £1.65 million
2009/10 £1.75 million
2010/11 £1.8 million
The limits ongoing will be set by the Treasury for the next 5 years but the limits will never decrease.
Pensions in payment, for example income drawdown are converted to a fund value. The individual’s pension in payment is multiplied by a factor of 25 to determine the fund value to be used.
The value of these benefits are tested against the lifetime allowance when a ‘benefit crystallisation event’ (BCE) occurs, for example becoming entitled to a lump sum or a pension income.
The value of the fund that exceeds the Lifetime Allowance is subject to a tax charge.
* 55% if the excess is drawn as a lump sum
* 25% if the excess is used to provide additional retirement income
The fund will be subject to a second lifetime allowance test at age 75. This will be based on the growth in the fund between the value at the first BCE (after any tax free cash has been taken) and the fund value at the time of the test.
There are transitional rules that apply to benefits accrued pre ‘A’ Day, 6 April 2006 that are in excess of the Lifetime Allowance, either at ‘A’ Day or in the future, to protect the fund value.
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