Retirement
Lifetime allowance changes: Your questions answered
As we move swiftly towards a reduction in the lifetime allowance threshold, Adrian Walker, pensions expert at Skandia, provides a run-down of all you need to know.
The reduction in the lifetime allowance for private pension savings, due to come into force from the start of the 2014-2015 tax year, has presented further tax year-end planning issues for savers who have already built, or who are in the process of building, significant savings.
What is the change?
The lifetime allowance will be reduced to £1.25m from the current threshold of £1.5m from the start of the next tax year. For the future, if savers 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 saver 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 you do to avoid or reduce the charge?
The government has provided two solutions to protect the future value of your 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. A summary of the key points of each of these is set out in the table below.
| Key points | Fixed protection 2014 | Individual protection |
| What is the maximum level of protection available? | Savers will be protected from a lifetime allowance tax charge based on a future lifetime allowance of £1.5m. |
Savers 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.
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| Can savers accrue further benefits from 6/4/2014 and still keep protection? |
No. There can be no further money purchase contributions paid on or after 6/4/2014.
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Yes. Benefits can continue to be built up and contributions can still be made into registered pension schemes. |
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Is this form of protection available if a saver has already registered for other forms of protection?
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The only other form of protection a saver can have alongside fixed protection 2014 is individual protection. | Individual protection is available for savers who have registered for enhanced protection, fixed protection 2012 or fixed protection 2014. |
| When will savers need to register for this protection? | A valid application must be received by HMRC no later than 5 April 2014. |
Application can be made in paper form or online. 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.
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What are the other key issues?
Additional funding in 2013-2014 tax year
If you are 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 savers 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
If individual protection applies to you, there is a need to accurately value your savings as at 5 April 2014 to see whether, for this purpose, they have a value of at least £1.25m.
How many people will be affected?
The government’s latest assessment of the numbers potentially affected by these changes indicated that 60,000 people would look to register for either or both of the above forms of protection. In addition, a further 50,000 who had previously registered for enhanced or fixed protection 2012 may register for individual protection.
