Dealing with the Life Time Fund Limit

Lifetime Allowance Check

With effect from 6th April 2006 the Government imposed an initial life time limit upon an individual's pension funds of £1.5 million. This limit rises to £1.8 million for the tax year 2010/2011. Details of the limit beyond that date have not been published by the Treasury. Funds in excess of the limit in the year benefits are taken can be subject to a recovery tax at a rate of 55%.

There is a range of options available to you which can be considered to avoid paying unnecessary addition tax upon your retirement funds.

For guidance purposes only, to calculate the value of your NHS Pension benefits for the Lifetime Fund Limit, multiply your retirement pension by 20 and add on the value of your tax free lump sum.

To apply for a statement of your NHS Pension Scheme benefits Click Here

Take a higher Tax Free Lump sum at the point you retire

With effect from 1st April 2008 it became possible to take as larger tax free lump sum at the point of retirement, however at the expense of a lower starting pension.

For example

An individual with an NHS pension of £45,000 per annum would also receive a tax free lump sum of £135,000.

However using the following formula

£45,000 x 30
7

They could take a higher tax free lump sum of £192,000 as opposed to £135,000. However their initial pension is reduced by £1 for every £12 of additional tax fee cash and would result in a starting pension of £40,250 gross per annum.

If we apply this principle in the situation whereby individual's NHS Pension benefits exceed the Lifetime Fund Limit prior to retirement, it is possible that they can take higher tax free lump sum and avoid paying a 55% tax charge on funds exceeding the Lifetime Fund Limit.

Case Study

Lifetime Fund limit for the 2008/2009 tax year is £1.65 million.

An individual will be in receipt of an initial pension of £73,000 per annum plus a tax free lump sum of £219,000.

The equivalent Lifetime Fund value of this is £73,000 x 20 plus £219,000 = £1,679,000.

Therefore a tax charge of £15,950 would be levied. (£1,679,000 - £1,650,000 x 55%)

If the maximum tax free lump sum is taken the position is entirely different;

£73,000 x 30 / 7 = £312,857

Therefore a higher tax free lump sum of £312,857 can be taken as opposed to £219,000. The starting pension will be reduced by £7,821.41 to £65,178.59.

The new Lifetime Fund value now looks like this;

£65,178.59 x 20 plus £312,857 = £1,616,428.80 and is therefore below the current LFL of £1,650,000.

The net result is that the scheme member is in receipt of an additional tax free lump sum of £93,857 and has saved £15,950 in recovery tax. Although the initial pension will be lower.

Please note:

Interestingly, the spouse's/partners and children's pension benefits are based upon the pre commutated pension amount.

Allocation

There is a facility within the NHS Pension Scheme rules whereby a member can give up part of their pension in order to enhance their partners/spouses pension. Therefore an individual can engineer a situation where they give up a sufficient amount of their initial NHS retirement income, thus bringing the pension fund value down below the Life Time Fund Limit.

Leave the scheme

You could leave the NHS Pension Scheme in which case your current benefits would be preserved and protected against inflation until you retire. You would no longer have to make contributions to the scheme and providing that the Lifetime Fund Limit increased at a greater rate than the value of your preserved NHS Pension benefits, they could have fallen below the point at which additional tax becomes payable when you retire.

Please note:

Once an individual leaves the NHS Pension scheme they may loose their valuable death in service benefits.

It is strongly recommended that you take professional advice from a Specialist Independent Financial Adviser.

Next: Pension Transfers out of the NHS Pension Scheme