Savers with pension pots greater than £1.25m could be hit with a tax charge of up to 55% of the amount over the Lifetime Allowance when they come to take their benefits. So an individual with a pension pot of £1.5m (currently within the Lifetime Allowance limit) could face a charge of up to £137,500 if they do not protect themselves from the looming cuts to the lifetime allowance.
We have already seen the Lifetime Allowance cut from £1.8m to £1.5m in 2012 and now again to £1.25m. So, what can be done for those that may be affected?
The UK government has introduced two new protection options to secure a higher Personal Lifetime Allowance; Fixed Protection 2014 and Individual Protection 2014.
Fixed Protection 2014
Fixed Protection 2014 is very similar to the fixed protection regime that was introduced in April 2012 following the cuts to the Lifetime Allowance from £1.8m to £1.5m. A successful applicant to Fixed Protection 2014 will have their Lifetime Allowance fixed at £1.5m and therefore will not have to pay a lifetime allowance charge on their pension savings up to £1.5m – a potential tax charge saving of £137,500.
Fixed Protection 2014 is only available for individuals that do not already have Primary, Enhanced or Fixed Protection (2012).
It is important to note that an individual will lose this protection if;
- Contributions are made to any Defined Contribution Scheme after 5 April 2014;
- Increases are made to any of their Defined Benefit Schemes in excess of a set amount.
Important: Individuals must apply for Fixed Protection 2014 by 6 April 2014. You can apply for Fixed Protection 2014 online on the HM Revenue & Customs website.
Individual Protection 2014
Unlike Fixed Protection 2014, which is available to any individual without existing protection, Individual Protection is only available to clients with pension savings in excess of £1.25m on 6 April 2014. Upon application, the client’s personal Lifetime Allowance will be equal to the value of their pension rights on 5 April 2014 – up to an overall maximum of £1.5m.
Importantly, Individual Protection will not be lost if the client makes further pension savings after 5 April 2014.
Pension Savers will have up to 5 April 2017 to apply for Individual Protection 2014. We do not expect to see an application process announced by HMRC until autumn 2014.
Individuals can apply for Fixed Protection 2014 and Individual Protection 2014 so these options should be considered carefully and the best option for the client will be dependent on their individual circumstances.
HMRC have created a Lifetime Allowance checking tool, which can be used to help a client and their adviser decide whether to apply for Fixed Protection 2014 and/or Individual Protection 2014.
Chris Melville is technical consultant at Brooklands Pensions
