By Dr Graham Brown, Forth Capital
Anyone who has pension benefits with a value in excess of the lifetime allowance (LA) will be subject to a tax charge on their excess benefits value known as the lifetime allowance charge.
Key facts
The lifetime allowance was introduced in April 2006 and is the maximum value of benefits that can be taken from a registered pension scheme without being subject to the lifetime allowance charge.
Benefits in excess of the lifetime allowance could be protected from the lifetime allowance charge by using primary, enhanced, fixed and individual protection.
The lifetime allowance has been steadily decreasing since 2012 as follows:
2011/12 £1,800,000
2012/13 £1,500.000
2013/14 £1,500.000
2014/15 £1,250,000
2015/16 £1,250,000
From 2016 the level is set to drop to £1 million.
Lifetime allowance charge (LAC)
The LA creates a ceiling on the benefits value that can be built up by members of registered pension schemes whilst continuing to benefit from tax relief. If the benefits value when they are taken exceeds the LA the difference between the two is subject to the LAC. The LAC can be applied in either of two ways or a combination of both depending on how the excess benefits value above the LA is taken. The charge is:
55% if taken as a lump sum, or
25% if taken as income.
How Does a QROPS help me with the Lifetime Allowance?
When somebody takes any of their benefits this is known as a ‘benefit crystallisation event’. A transfer to a QROPS is such an event and any amount in excess of the LA will be taxed at 25%. Therefore if you are approaching the LA limit, or indeed exceed it, you should seriously consider a transfer to a QROPS for the following reasons:
- Crystallisation now will either avoid the LAC or minimise it now.
- By leaving your pension you are increasing your tax liability
- Any growth after crystallisation will not currently be subject to the LAC.
As an example, if your pension is currently valued at £712,000 it will hit the £1 million level at 7% growth after only 5 years.
Author's bio
Dr Graham Brown has over 30 years’ experience in the Financial Services Industry throughout Asia, the Middle East and Europe. Working for a number of major Financial Institutions including Old Mutual, Credit Lyonnais and Jardine Fleming, Graham has vast experience in managing an array of diverse businesses. Graham joined Forth Capital in 2012 to set up and manage the Hong Kong subsidiary.
Graham specialises in pension transfers, inheritance tax planning and all aspects of personal finances. Having been an expat throughout the last 30 years, Graham has a strong understanding of the expatriate market and an array of personal experience.
Graham is UK qualified, with a Level 4 Diploma in Regulated Financial Planning and is a registered Chief Executive with the Hong Kong Confederation of Insurance Brokers and registered with the Hong Kong Securities and Futures Commission as a Responsible Officer. Graham holds a BSc and PhD in Marine Biology.
Qualifications
- UK FSA Level 4
- HK SFC Investment Adviser
- HK CIB Technical Representative
- HK CIB Chief Executive
