In his latest Budget on 8 July, the chancellor George Osborne confirmed a widely expected cut in the lifetime allowance for pension savings to £1m from £1.25m ($1.95m, €1.79m) effective from the start of the next financial year.
As it did when it last cut the allowance to £1.25m in 2014, HMRC has now confirmed that it will offer transitional protection to savers for the benefits they have built up in their pension plans to ensure the reduction is not retrospective.
And as in 2014, it will be offering two protection regimes – fixed and individual protection – which will have the same conditions as the previous schemes.
The fixed protection is for those savers who will not be making any further contributions to the pension plans and where the schemes will not be accruing any further benefits after the 6 April 2016 deadline. It allows them to keep their allowance at £1.25m.
“Individuals will not need to notify HMRC in advance where they want to rely on fixed protection."
Individual protection does allow for future funding to the scheme or for growth in the pension plan up to the £1.25m limit though the taxpayer must have savings of at least £1m by the end of the current tax year.
Notification changes
HMRC said in its latest Pension Schemes newsletter that the notification process to register for these protection schemes will be different compared to the 2014 system.
“Individuals will not need to notify HM Revenue and Customs (HMRC) in advance where they want to rely on fixed protection or have three years to apply for individual protection. Instead, HMRC are considering options around removing the deadlines for applying for these protections.”
Tax officials will be holding informal discussion with the industry over the next few weeks in order to publish full details later this summer.
“It looks like there will be no change in the forms of protection but, given all the changes in the Budget, they might be talking about an extended deadline for individuals to register for protection of their lifetime allowance,” said Adrian Walker, retirement planning manager at Old Mutual Wealth.
The lifetime allowance was introduced in 2006 at a level of £1.5m and had increased to £1.8m by 2010 but since then it has been steadily reduced to its current level of £1.25m for the 2015-16 tax year.
