Dealing with a cut to the Lifetime Allowance (LTA) may seem a little like ‘Groundhog Day’ – we’ve been here before in 2014 and 2012. But each subsequent cut brings the impact more and more into the mainstream – affecting an increasing number of our clients.
Aside from the fundamental ‘protect or not’ question, the need to review pension saving after April raises a number of other advice issues which may need urgent attention before April:
- Should you pay a final pension top-up before opting for Fixed Protection?
- Should you increase contributions to maximise the level of protection available?
- Without protection could you secure a higher tax free cash entitlement by crystallising and taking your ‘tax free cash’ before April?
Who should be concerned?
A £1M limit begins to bring LTA concerns into the mainstream. An accrued £50,000 p.a. Defined Benefit (DB – otherwise known as ‘Final Salary’) pension entitlement will now hit the threshold. This pension would have been £90,000 p.a. when the LTA was at its peak of £1.8M – so it represents a considerable drop.
Even allowing for the fact that from April 2018 the LTA will increase in line with CPI, a fund of £780,000 today will breach the LTA in 10 years’ time if it achieves a real rate of return of 2.5%. And that’s without making any further contributions.
There’s much to consider and action may be needed before the tax year end.
Locking into a higher Lifetime Allowance
Shaving £250,000 off the LTA could see a tax charge of up to £137,500 for people with pension funding in excess of the reduced limit if you don’t put protection in place (£250,000 taxed @ 55%). It could also reduce the maximum ‘tax free cash’ amount that can be taken from £312,500 to £250,000. If you are entitled to TFC greater than this amount and you don’t wish to apply for protection you may want to crystallise benefits before April.
Two new forms of protection will be available for those caught. These mirror the protection options from 2014.
Fixed protection 2016 allows you to keep a £1.25M LTA beyond 2016. But, as before, there’s a trade-off:
- Defined Contribution scheme (DC – otherwise known as ‘Money Purchase’) contributions have to stop after 5 April 2016
- Increases in DB rights can’t exceed the ‘relevant percentage’ (normally CPI for the previous September) in any tax year from 2016/17 onwards
So this only leaves a short window to maximise your tax efficient contributions and build a bigger retirement pot to protect. Don’t forget that carry forward of unused annual allowance could be used as a final funding boost. And with the amendments to the annual allowance and alignment of pension input periods in 2015/16, there could be scope for additional funding this year.
Individual protection 2016 is only available to you if you have pension savings worth more than £1M on 5 April 2016. This gives you a personal LTA equal to your benefit value on 5 April 2016 (up to a maximum of £1.25M). Importantly, Individual Protection 2016 allows funding to continue. There’s no downside to individual protection, so anyone eligible should do it. You’ll secure an increased LTA with no trade-off. It can be used alongside any of the fixed protections to provide a safety net to fall back on if fixed protection is lost.
Anyone close to the LTA may want to consider some additional funding before the end of the tax year to push the fund value over the £1M limit to secure individual protection.
However, the deadlines for registering for protection will change. Individuals will no longer need to apply for fixed or individual protection before next April. New deadlines are currently under consideration and due to be announced later in the year.
Protection won’t be right for everyone – especially if it means missing out on valuable employer pension funding. Some will be in a better position by continuing to fund and paying the tax charge.
Looks like we will need to wait a little longer to find out the details about pension protection against the Lifetime Allowance.
On the 28th September, HMRC issued Pensions Schemes Newsletter 72. Of interest to firms will be the update given on the new forms of transitional protection for the reducing lifetime allowance in April 2016.
Lifetime allowance reduction and transitional protection – delay for forms “From 6 April 2016, the lifetime allowance (LTA) for tax relieved pension savings will reduce from £1.25 million to £1 million. In Pension Schemes Newsletter 71 we said we would aim to provide further information about the transitional protection on offer. Unfortunately, we are not able to provide as much detail as we would have liked. Legislation for both the reduction in the LTA and the protection regimes (fixed protection 2016 (FP2016) and individual protection 2016 (IP2016)) will be delivered in Finance Bill 2016. As a result it will not be possible for scheme members to apply for protection until after April 2016. This means that individuals cannot notify us of their intention to rely on FP2016 in advance. Individuals who want to rely on FP2016 need to start thinking about what arrangements they need to make to stop accruing benefits after 5 April 2016. The application process for FP2016 and IP12016 will be online and will require the member (or their authorised representative) to provide similar information and declarations as for FP2014 and IP2014. The online system will provide a response to the notification along with a protection reference number. The member will need to provide this protection reference number to their pension scheme in order to take their benefits using a protected LTA. For these protection regimes, no certificate will be issued”. View the newsletter in full here: