Top Tip – Primary Protection CII R04, J05 and AF3

The Pensions legislation isn’t easy.  It never has been and I don’t suppose it ever will be…

The calculation for primary protection became a bit more complicated since a quirk in 2012/13 legislation.

Here’s an example from our R04 calculation workbook:

Maureen had benefits at A-day valuing £1,875,000, giving her a primary protection factor of 25%.  In October 2009 Maureen crystallised benefits worth £900,000, at this time the lifetime allowance was £1.75m. In August 2012 Maureen wanted to vest the remaining pension benefits, worth £1,450,000.   Is Maureen liable to the lifetime allowance charge?

First, establish her personal lifetime allowance at 2009/10; £1.75m + (£1.75m x 25%) = £2,187,500.  The value of benefits taken is then calculated against this – £900,000 ÷ £2,187,500 = 41%.  So, we know that at this time Maureen has used 41% of her personal lifetime allowance.

At the next crystallisation event in 2012/13, we recalculate her personal lifetime allowance based on the underpinned lifetime allowance.  £1.8m + (£1.8m x 25%) = £2,250,000

The amount of lifetime allowance used up by the first BCE in 09/10 is then worked out:

£900k x £1.5m/£1.75m = £771,428 – this amount of her personal lifetime allowance has been used in respect of the £900k previously crystallised.

Her personal lifetime allowance is £2,250,000 so her remaining lifetime allowance is £2,250,000 – £771,428 = £1,478,572.  As her remaining benefits are valued £1,450,000 she has no LTA charge.

The R04 manual then says to work this out more easily you just take £900k and divide it by £1.75m = 51.43%.  Apply the same % to the standard LTA in 2012/13 which equals £771,450.  This can then be deducted from the personal lifetime allowance of £2.25m which gets us almost to the same point (£1,478,550).

Not sure why they just don’t explain it like that in the first place!