Calculating Your Lifetime Allowance
To find out how much of your lifetime allowance you’ve used, you’ll need to contact your pension provider(s) who should be able to tell you. If you have more than one pension, make sure you tot up what you’ve used in all of the different schemes you belong to.
What counts towards your lifetime allowance depends on the type of pension scheme you have.
Lifetime Allowance and Defined Contribution Pensions
In a defined contribution or money purchase pension scheme, you calculate your lifetime allowance based on the value of your pension pot you’re going to use to fund your retirement.
Lifetime Allowance and Final Salary Pensions
If you have a defined benefit or final salary pension, then the calculation of what counts towards your lifetime allowance is a little more complicated.
Here, you multiply the annual pension due from by 20, and add any tax-free cash lump sum. For example, in the 2019/20 tax year you can receive an annual pension of up to £52,750 before you are hit by the tax charge, as £52,750 multiplied by 20 is £1,055,000 (assuming you take nothing as a cash lump sum),
Warning: The LTA and Leaving a Final Salary Scheme
A final salary pension transfer involves you accepting a lump sum payout to transfer out of a defined benefit pension and into a defined contribution scheme. While this option won’t be right for most people, for the minority of those for whom this is the best path to take there’s a lifetime allowance risk attached.
Final salary pension transfer values, known as cash equivalent transfer values or CETVs, is the amount of money the pension provider is willing to pay you to leave the scheme. Values have been high of late, partly because many schemes have been keen to encourage members to leave due to affordability issues.
However, it’s important that you remember that although a large DB pension transfer value might seem tempting, it could have big implications for your pension lifetime allowance. That’s because, inside a final salary scheme, the proportion of your lifetime allowance you’ve used is calculated as 20 times your annual benefit.
If you leave your defined benefit pension for a CETV worth 30 times your annual benefit (which is something we’ve seen at Drewberry), though, you might find yourself inadvertently over the lifetime allowance and subject to the lifetime allowance charge.
You can use our Final Salary Pension Transfer Calculator if you’re interested in seeing how much your final salary pension scheme could be worth if you transfer out.