Posted on: 10 March 2016 by Omar Iqbal
With just weeks to go until the Lifetime Allowance (LTA) is potentially reduced again as proposed in the 2015 Budget, the Government has finally announced the finer details - and how individuals can help to protect their savings should they be at, or nearing, the new £1 million threshold.
The latest LTA reduction would be the third in the space of four years from its peak of £1.8 million in 2011-2012. It means any savings built up in a pension over a working life in excess of the new cap, could be hit by a tax penalty of up to 55% when they are drawn (depending whether they are taken in a lump sum or income).
Our calculations show it’s not just those in clear striking distance of the new threshold who may be impacted - if you earn £80,000 or more (and are in a final salary pension scheme), or have saved funds of £600,000 or more into your pension, you may need to take action to protect yourself from higher tax charges.
So, how can you calculate whether or not you’ll be affected?
Well, it depends on what type of pension you have, be it defined contribution, defined benefit or a combination of both, in payment or not. And the LTA doesn’t just relate to monies you have paid into your pension – if you invest successfully and the value of your fund rises to £1 million or more over time, you will still be penalised.
New pension freedoms complicate things further as, if individuals with defined benefit schemes decide to take their pension as a lump sum, they might transfer out at a higher amount, putting them danger of reaching the new limit.
Calculations to see if you are over the limit, or on course to breach it can be complicated and it’s something our Financial Planners can help with. Otherwise, you can contact the pension provider or your company who will be able to help.
What to do if you’re impacted by the reduced LTA
As in previous years when the LTA has been reduced, the Government has set up various protection arrangements for those who may be affected. However, these do come with conditions which need to be carefully considered. We would advise any of our clients who are unsure about their specific situation to speak with one of our Financial Planners or seek alternative independent advice.
Fixed Protection 2016
This allows individuals to lock into the current Lifetime Allowance of £1.25 million and protects against any future LTA reductions. However, individuals must stop any future pension saving – or active accrual from 5 April 2016.
There is no deadline for applying for this protection. However, individuals will only be eligible if they have stopped accruing benefits by 5 April 2016.
Individual Protection 2014/2016
This allows individuals to lock into the value of their pension savings the day before the new LTA limit comes into effect i.e. 4 April 2016. It is only available to those whose pensions are valued between £1 million and £1.25 million on 5 April. However, if you had funds valued between £1.25 million and £1.5 million as at 6 April 2014, you may still apply for Individual Protection 2014. You do not have to give up future pension savings with these protections.
How to apply for protection
HMRC is launching a new online application system. However, full details of the new system have not yet been revealed and it won’t be launched until July 2016. We do know that once the system is in place, HMRC will no longer issue protection certificates – instead individuals will receive a reference number.
Should you wish to apply for Fixed Protection 2016 or Individual Protection 2016 in the interim, you will need to write to HMRC after 5 April for a temporary protection reference and then apply online for a permanent protection reference again once the new system is launched.
Where we can help
The most important thing to know is that you will need to stop accruing pension benefits by 5 April 2016 if you think you need fixed protection.
But if you are unsure about your personal situation or whether you need to consider the new protections, we would be happy to assist. We can look at your retirement plans more holistically and apply for protections where applicable on your behalf.
Taking advice around these complexities is normally required and we would be happy to discuss your individual circumstances with you. Please get in touch with your Relationship Manager if you would like further guidance.