Simon

‘I’m consulting doctor for the NHS based in London. I’ve been in the pension scheme since I started working 30 years ago and am worried about breaching the lifetime allowance.

‘What are the rules and is there anything I can do to protect myself?’ 

As you’re in a defined benefit (DB) pension scheme the way the lifetime allowance is calculated is a little more complicated than for a defined contribution (DC) scheme.

To recap, the lifetime allowance for UK pension savers is currently set at £1,030,000. This will increase to £1,055,000 – in line with Consumer Prices Index (CPI) inflation – in 2019/20.

For those in a DC scheme like a SIPP, the amount of lifetime allowance you use will be ‘tested’ by HMRC whenever a ‘benefit crystallisation event’ occurs. All that means is that your fund is converted into a retirement income, usually by entering drawdown or purchasing an annuity.

For example, if someone with a £2m DC pot used £500,000 to buy an annuity, they would have used £500,000 of their lifetime allowance.

A further lifetime allowance test is applied at age 75.

DB schemes are different because rather than saving a pot of money you build up rights to an income based on your salary. For each year you’re in the scheme you’ll be promised a proportion of your salary (either career average or final) as a retirement income – usually
this lies somewhere between 1/50th per year and 1/80th per year.

For example, if you’d been a member of a final salary scheme with a 1/60th accrual rate for 30 years and your final salary at retirement age was £50,000, you’d receive 30/60ths of that amount, or £25,000, a year.

This amount will usually be inflation protected and your spouse (if you have one) will likely be entitled to 50% of your pension if you die before they do.

To figure out how much lifetime allowance you have used, a fairly crude multiple of 20 is applied to your annual entitlement. So in the example above the person has used £500,000 (20 x £25,000) of their lifetime allowance. Any tax-free cash you take will also be added to this figure.

If you do breach the lifetime limit you could end up facing a tax bill from HMRC. Unfortunately there are no easy answers for those who find themselves in this situation.

It’s worth considering applying for ‘fixed’ or ‘individual’ protection as these may allow you to benefit from a slightly higher lifetime allowance. You can find out more about the rules here: https://www.youinvest.co.uk/pensions-and-retirement/pensions-explained/lifetime-allowance.

The other unpalatable options available include reducing your hours,
stopping working altogether or quitting the scheme. Before taking any drastic action of this nature it’s worth speaking to a regulated adviser to assess your options.

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