How is the Lifetime Allowance calculated?
For pensions that start to be drawn on or after 6 April 2006, the capital value of those pension benefits is calculated by multiplying your annual pension by 20 and adding any lump sum you draw from the pension scheme.
Each time you take payment of a pension benefit the capital value of the benefits you are taking is expressed as percentage of the lifetime allowance (LTA) limit applicable on that date and is deducted from your available LTA. So even if your pensions are small and individually will not be more than the LTA you should keep a record of any pensions you receive.
If you have a pension that came into payment before 6 April 2006, this will also be treated as having used up part of your LTA. For these pensions, the capital value is calculated by multiplying the current annual rate, including any pensions increase, by 25. Any lump sum already paid is ignored in the valuation.
When you take your LGPS benefits, if the capital value of those benefits is more than your available LTA you will have to pay tax on the excess. If your excess benefits are paid as a pension the tax charge will be 25% of the capital value of the excess; the ongoing pension payments be will also be subject to income tax. If the excess benefits are taken as a lump sum they will be taxed once only at 55%.
You can choose to pay the tax charge immediately by a reduction to your lump sum, pay the tax directly to HMRC yourself, or you can ask the scheme to pay the charge for you in return for a permanent reduction to your pension – this is called a LTA debit.