The LTA for most people is £1.073 million in the tax year 2020-21.

It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.

This increases annually in line with the Consumer Prices Index (CPI).

Every time a payout from your pension schemes starts, its value is compared against your remaining lifetime allowance to see if there is additional tax to pay.

You can work out whether you are likely to be affected by adding up the expected value of your payouts.

You work out the value of pensions differently depending on the type of scheme you are in:

• For defined contribution pension schemes, including all personal pensions, the value of your benefits will be the value of your pension pot used to fund your retirement income and any lump sum
• For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension. So you are likely to be affected by the lifetime allowance if you are on track for a ‘defined benefit’ pension (with no separate lump sum) of more than £50,000 a year or a salary-related pension over £37,500 plus the maximum tax-free cash lump sum.

If the cumulative value of the payouts from your pension pots, including the value of the payouts from any defined benefit schemes, exceeds the LTA, there will be tax on the excess – called the LTA charge.

The way the charge applies depends on whether you receive the money from your pension as a lump sum or as part of regular retirement income.

Any amount over your LTA that you take as a lump sum is taxed at 55%.

Your pension scheme administrator should deduct the tax and pay it over to HMRC, paying the balance to you.

Any amount over your LTA that you take as a regular retirement income – for instance by buying an annuity – attracts a lifetime allowance charge of 25%.

This is on top of any tax payable on the income in the usual way.

For example, suppose someone who pays tax at the higher rate had expected to get £1,000 a year as income but the 25% lifetime allowance charge reduced this to £750 a year. After Income Tax at 40%, the person would be left with £450 a year.

This means the LTA charge and Income Tax combined have reduced the income by 55% – the same as the LTA charge had the benefits been taken as a lump sum instead of income.

For defined benefit pension schemes, your pension scheme might decide to pay the tax on your behalf and recover it from you by reducing your pension.

If you wish to avoid the lifetime allowance charge it’s important to monitor the value of your pensions, and especially the value of changes to any defined benefit pensions as these can be surprisingly large.

You might also wish to consider applying for protection if your pension savings is expected to exceed the lifetime allowance threshold.

The College Remuneration Committee reviewed the Government’s changes on pension taxation in 2016 and agreed the Lifetime and Annual Allowance Information for individuals who were impacted by pension tax allowances.

As a result of the recent reduction to the lifetime allowance (LTA), two forms of protection have been made available by HMRC. Eligibility for the new protections depends, amongst other things, on which previous protections you may already have in place.

The new protections are known as fixed protection 2016 (FP2016) and individual protection 2016 (IP2016).

Under FP2016, you will be given a protected LTA of £1.25million, provided you meet certain conditions, the main condition being that you must stop building up any further pension benefits, either in USS or elsewhere. If you build up any further pension benefits after 5 April 2016 (regardless of when you applied for FP2016) your protection will be lost, and the standard £1million LTA will apply. Anyone without previous protections (except IP2014) can consider applying to HMRC for FP2016.

Under IP2016 you are given your own personal LTA amount, which is equivalent to the LTA value of your pension benefits built up to 5 April 2016, subject to a maximum of £1.25million. Although the amount protected may be less than under FP2016, the main difference is that you can continue to build up further pension benefits without the loss of this protection. Any benefits in excess of the protected amount will be subject to the LTA excess tax charge when put into payment.

Only those without primary protection, or IP2014, and with pension savings over £1million can apply to HMRC for IP2016.

Note that, under both FP2016 and IP2016, should the standard LTA increase in future to an amount greater than your protected LTA under FP2016 or IP2016, then the standard LTA will apply to your benefits instead (i.e. you will not end up with a lower LTA by having a protection in place).

An online application process for both forms of protection is available from HMRC Website.

If you are affected by any of these allowances, you may feel you need some extra help and advice to help you decide whether you wish to take protection or even whether you wish to remain a member of a pension scheme.

To help with this the College has signed contracts with a range of Independent Financial Advisors (IFA’s)) who are available to assist in reviewing your options.