Pension Lifetime Allowance 2012

Pension Lifetime Allowance 2012 Explained

The Treasury confirmed new legislation with effect from 2012 for changes to Pension Lifetime Allowances, the maximum value of pension funds that you take in your lifetime.

The Lifetime Allowance April 2012 – reduced to £1.5m from £1.8m
This is a calculation done when you take pension benefits e.g.  retire and buy an annuity, release a tax free lump sum or take pension drawdown.

Example: Mr Smith in planning to retire in this next 2 yrs.  He has:

• A Sipp Valued at £200,000
• A Company Money Purchase Valued at £550,000
• A Final Salary Pension with accrued pension benefit of £50,000 pa.

Retiring before April 2012 - Lifetime Allowance Calculation (assuming no further growth)

• Investment Linked Pensions Total = £200,000 + £550,000 = £750,000
• Final Salary Pension Valuation = £50,000 pa X 20 = £1,000,000
• Total Pension Valuation for Lifetime Allowance = £1,750,000
• Lower than £1.8m = no tax charge

Retiring after April 2012 - Lifetime Allowance Calculation (assuming no further growth)

• Investment Linked Pensions Total = £200,000 + £550,000 = £750,000
• Final Salary Pension Valuation = £50,000 pa X 20 = £1,000,000
• Total Pension Valuation for Lifetime Allowance = £1,750,000
• Pension Valuation Higher than new £1.5m Lifetime Allowance = Tax Charge Applies UNLESS YOU HAVE APPLIED FOR FIXED PROTECTION of your Lifetime Allowance

Pension Contributions After Age 75
Pension contributions after age 75 will not receive tax relief and will be a test against the Lifetime Allowance at age 75 regardless of whether pension benefits have been crystallised at that point.

Conclusion
Mr Smith should retire before 2012.

1.  Fixed Protection Lifetime Pension Allowance 2012

On 6 April 2012 the lifetime allowance (the maximum you can accrue in total in your pension funds) throughout your lifetime will be reduced from £1.8m to £1.5m. 

Pension Fund Already Exceeds Lifetime Allowance - If you have a pension fund larger than £1.5m you may face a tax charge on the day you retire on or after 6 April 2012.

Transition Enhannced and Primary Protection (2006) - Some people may have already protected their large pension fund benefits before 2006 by using Enhanced or Primary Protection.  If this is the case, you are unaffected

Fixed Protection from 2012 - If your pension fund is already over £1.5m ...  do you qualify for fixed protection.

Who qualifies for protection?

• Your pension funds are worth more than £1.5m in total after 5 April 2012 and
• You have stopped accruing further pension rights after 5 April 2012
• You do not already have enhanced or primary protection for larger pension rights

How do I apply for fixed protection?

• Download application online, print, complete and post to HMRC - application will be available in 2011

Latest date for application for fixed protection

• 5 April 2012

Can I still make pension contributions if I have registered for fixed protection?

• No, you can longer make contributions to a money purchase (investment linked) pension schemes although you may continue to pay into a final salary or salary related pension provided your "benefits" entitlement do not increase (this of course may be a risky practice).

Can I transfer pensions and keep fixed protection?

• Yes, provided it is:
• An investment linked money purchase scheme transfer to another investment linked money purchase scheme
• A pension credit transfer on divorce

Transferring pensions and losing fixed protection

• You may lose fixed protection by doing the wrong type of pension transfer such as from a money purchase pension to a cash balance arrangement or a defined benefits arrangement. 
• You may also lose fixed protection if you transfer from a cash balance or defined benefits arrangement to another cash balance or defined benefits arrangement if the transfer was not because your pension scheme was being wound up or you employer has the business and your pension is being transferred as part of a wider movement to any new employer scheme.

2. The End of Contracting Out in 2012 - The end of protected rights.

It is not common knowledge that we have a second state pension on top of our basic state pension in the UK.  

This is paid for from national insurance contributions (NIC).  Many years ago it was called the Graduated Scheme, then it changed to SERPS in the late 1970’s and now it is the State Second Pension (S2P).  

Many people ‘contracted out’ to have their national insurance payments paid into their own pension.  

On 6th April, contracting out ends for personal pensions but not for ‘final salary’ pension schemes.

Your ‘protected rights’ funds will automatically be converted to ‘ordinary’ pension rights, just like premiums you have paid in.  It will still be possible for final salary pension schemes to be contracted out, thus using your national insurance to subsidise the company pension.  

Some may be better served cancelling their contracting out before 6th April, so that this year’s NIC rebate will go back into the state second pension.

Others may prefer that this year’s national insurance ‘rebate’ should still go into their own private pots, given the huge changes coming for state pension ages.

• Option 1: Cancel Contracted Out before 6th April.  NIC rebate for 2011/12 will stay with the Department for Work and Pensions.
• Option 2: Stay Contracted Out until 5th April.  NIC rebate for 2011/12 will still go into your own pension.

Speak to a professional today and see if your funds are protected.