Pensions – Lifetime Allowances – Reductions and Protection

Pensions planning for higher earners is likely to become extremely topical in the balance of 2013 and early 2014.  

 

In previous Chapters Financial Blogs, we have referred to the forthcoming reduction in the Pension Annual Allowance from £50,000 to £40,000 from tax year 2014/2015. Another important allowance in respect of pensions is the Lifetime Allowance (LTA) which is the total deemed benefit amount held by an individual in all pension arrangements above which tax charges would apply.

 

I have looked at a few of the points you might want to consider below.

 

Lifetime Allowance (LTA) – Limits

 

The Lifetime Allowance was introduced on 06 April 2006 through legislation. The Lifetime Allowance (LTA) is currently £1.5M (tax year 2013/2014) and is due to reduce to £1.25M at the beginning of the new tax year, from 6 April 2014. This limit has already dropped from £1.80M (tax year 2011/2012) and the apparent trend may continue as the Treasury tries to garner more taxable funds. There is no guarantee this is the case and only time will tell.

 

Tax on Excess above LTA

 

If individuals’ total benefits accrued are greater than the Lifetime Allowance (without suitable protection), then a punitive tax charge would apply on the excess benefits of 55%, if taken as a lump sum, or 25% if taken as taxable pension income. Therefore, it could be more beneficial to remain within the Lifetime Allowance limit and divert any disposable income to other tax-efficient wrappers / products.

 

HMRC Consultation

 

It should be noted that HMRC have launched a consultation paper (June 2013) on possible smaller changes to the application of the LTA and this can be found here:

 

https://www.gov.uk/government/consultations/pensions-tax-relief-individual-protection-from-the-lifetime-allowance-charge

 

Please note that this is a consultation and we will endeavour to keep our readers posted on any agreed changes.

 

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Protection of Benefits

 

The government is allowing individuals to protect deemed pension benefits which have accrued greater than £1.25M prior to 06 April 2014. Confirmation and the documentation to achieve this should be available from autumn 2013.

 

This protection will be known as Fixed Protection 2014 (or FP14) and Individual Protection 2014 (or IP14). Each protection offers a different type of pension protection to the individuals’ benefits and are applied for at different times.

 

·         FP14 must be applied for prior to 06 April 2014.

 

·         IP14 can be applied for in a 3 year window from 06 April 2014.

 

It should be noted that IP14 is still in the consultation phase and has not been passed as legislation.

 

Defined Benefit Schemes

 

It is worth noting that Defined Benefit schemes (such as a Final Salary scheme) are valued, against the Lifetime Allowance, using a factor of 20, plus lump sum where applicable.

 

As an example, any pension income benefit accrued over approximately £62,500 pa (with no tax free cash) could breach the new reduced £1.25M Lifetime Allowance (2014/2015).

 

You should seek individual advice on this topic if it affects you.

 

Professional Advice

 

Whenever changes to pension legislation are due to come into force then considered financial planning should be sought from professional independent financial advisers.

 

If you would like to know more about this pension planning, your tax allowances and the different types of protection available then please contact the team at Chapters Financial Limited on 01483 578800.

 

No individual advice has been provided in the text of this blog. You should seek independent financial advice (IFA) in your own individual circumstances and needs.

Simon Hewitt BSc (Hons) DipPFS

Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.