News/Events

How to tell what your retirement benefits are worth [4th February 08]

I have touched on the complexities of Pensions Simplification in a previous article and thought it would be an idea to expand on “The Lifetime Allowance” which is relevant to anyone intending to take any retirement benefits. 

Although many will be unaffected by the limit introduced, I have been involved this week with clients where it is particularly relevant. The Lifetime Allowance is a limit on the total value of retirement benefits that you can build up in all of your pension arrangements and started at £1.5 million at A-Day (6^th April 2006) for the year 2006/2007, £1.6 million for the current year rising to £1.8 million in 2010/2011.

So how do you tell what your benefits are worth? Quite simply, you will need to add up the value of any of the following:-

1)      The value of the pension benefits you are about to take.  The percentage of the Lifetime Allowance will be shown in your pension retirement quotation e.g. if your fund is £160,000 then it will show a figure of 10% and that is the amount used up and you still have 90% more to go.

2)      Any Pensions (apart from the state pensions and any widow / widower /surviving civil partner / spouse / dependant’s pension) you already are receiving, that started before 6^th April 2006.  The value of these benefits is the annual amount of pension multiplied by 25 e.g. a monthly pension of £450 would be £5400 x 25 = £135,000. If this is the first time you have taken retirement benefits since 6^th April 2006, you should use the current amount of the pension payable. If your pension started at £5400 per annum but was increased through inflation to £5800 then it would now be £145,000. However, if this is not the first time, you should use the amount of pension in payment at the time you took benefits after 6^th April 2006.

3)      Income from any pension fund withdrawal plan (income drawdown/USP) started before 6^th April 2006. Although you may not be taking the maximum and could be taking nothing at all, the value for Lifetime Allowance is still 25 x the maximum income permissible. There is also the proviso above.    

4)      With the normal exemptions in (2) above, any retirement benefit that you have taken since 6^th April 2006. The company paying you the benefit should have given you a statement showing in percentage terms, how much of your Lifetime Allowance was utilised.

5)      Any retirement benefits transferred to a Qualifying Recognised Overseas Pension scheme (QROPS).  Again, the scheme administrator of the plan being transferred will give a statement showing the percentage of Lifetime Allowance used.

6)      Any other retirement benefits being taken simultaneously.  For the records any other retirement benefits that you are planning to take at a later date can be ignored at present as they will be tested` against the relevant Lifetime Allowance at that time.

If when wishing to take benefits you calculate that you are within the Lifetime Allowance then no problem but if you are above this then you need professional advice. It maybe that you can gain some form of protection, that is, “ Primary Protection” or “Enhanced Protection” and this needs to be registered before 5^th April 2009 with HMRC.