Important pension news over lifetime allowance

IMPORTANT PENSION NEWS

REDUCTION IN THE LIFETIME ALLOWANCE

There are some important changes being made to the lifetime allowance, and any individuals who think they may be affected by this should seek advice as soon as possible. Those affected are likely to be higher earners who have accumulated larger pension funds and/or substantial accrued final salary pension benefits.

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What is the Lifetime Allowance?

The Lifetime Allowance (LTA) is the maximum amount of tax relieved pension that you can build up over your life.

What is the change?

The lifetime allowance will be reduced to £1.25m from the current threshold of £1.5m. That will change from the start of the next tax year.

For the future, if individuals crystallise pension savings in excess of the reduced lifetime allowance tax threshold, the excess will be subject to a tax charge of:

• 55% if taken as a lump sum, or:

• A withholding tax of 25% if the excess is taken as additional income, on which the client will be subject to income tax at their highest rate(s), creating, for a higher rate tax payer, an effective rate of tax of 55%.

What can clients do to avoid or reduce the charge?

The government has provided two solutions for individuals to protect the future value of their pension savings, up to certain thresholds, from a lifetime allowance tax charge.

The two forms of protection, which are not mutually exclusive, are known as fixed protection 2014 and individual protection.

Fixed protection 2014

• Individuals will be protected from a lifetime allowance tax charge based on a future lifetime allowance of £1.5m.

• There can be no further money purchase contributions paid on or after 6/4/2014. For members of final salary schemes, the protection will continue to apply, provided their benefits do not increase, by either the increase in CPI or by the rate of increase allowed in the scheme rules as at 10 December 2012.

• The only other form of protection a client can have alongside fixed protection 2014 is individual protection.

• A valid application must be received by HMRC no later than 5 April 2014. Application can be made in paper form or online.

Individual protection

• Individuals will be protected from a lifetime allowance tax charge based on the value of their pension savings as at 5/4/2014. The minimum value at that date must be £1.25m, with an upper monetary protection threshold of £1.5m.

• Benefits can continue to be built up and contributions can still be made into registered pension schemes.

• Individual protection is available for clients who have registered for enhanced protection, fixed protection 2012 or fixed protection 2014.

• Applications for individual protection cannot be made until after the legislation is enacted in the Finance Bill 2014. This is likely to be from August 2014 at the earliest and clients will have three years from the 6 April 2014 in which to register.

Key issues to consider

For individuals thinking of registering for fixed protection 2014, any additional funding must be completed by the end of this tax year. This could include:

• Maximising current annual allowance of £50,000

• Making additional contributions in respect of carry forward of unused annual allowances from the pension input periods ending in the 2010-2011 to 2012-2013 tax years

• Adjusting pension input periods to advance fund the 2014-2015 annual allowance of £40,000

These could also be action points for clients where individual protection could apply. The planning could be used to create eligibility for individual protection, i.e. increasing the value of pension savings above the £1.25m lower threshold or to increase the level of individual protection that could be registered.

Valuing existing pension savings

For clients where individual protection could apply, there is a need to accurately value those savings as at 5 April 2014 to see whether, for this purpose, they have a value of at least £1.25m.

Valuation rules are as follows:

• Money purchase uncrystallised funds – transfer value of funds

• Pensions in payment that started before 6/4/2006, where no subsequent crystallisation has occurred – 25 times pension in payment. For capped drawdown, this will be maximum annual income withdrawal

• Final salary pension not in payment – 20 times pension plus face value of any pension commencement lump sum paid in addition

• Benefits crystallised on or after 6 April 2006. The value of the crystallisation event discounted by a factor of £1.5m, divided by the lifetime allowance applying in the year the original event took place

How many people will be affected?

The government’s latest assessment of the numbers of people potentially affected by these changes indicated that 60,000 new clients would look to register for either or both of the above forms of protection.

In addition, a further 50,000 clients who had previously registered for enhanced or fixed protection 2012 may register for individual protection.

Next Steps

If you think you may be affected by this issue it is important that you contact Lifetime’s Pension Department as soon as possible, certainly not later than the end of March 2014, to seek advice and assistance. Taking action now could help you avoid a substantial tax charge when you draw your pension benefits.

Telephone: 01226 208600; email: t.nelson@lifetime-fm.com

  •  Information correct at the time of writing (April 1).