Pension Lifetime Allowance 2014

Pension Lifetime Allowance 2014.

On 6th April 2014 the Lifetime Allowance for pensions reduced from £1.5m to £1.25m.

What is the Lifetime Allowance?

Introduced in 2006, the Lifetime Allowance is the maximum amount that any individual is allowed to accumulate in pension funds during their lifetime.

Calculating the Lifetime Allowance:

• Investment Linked/Money Purchase Pension Funds such as personal pensions and occupational money pension schemes: These have a monetary value amount and this is the value that is used to calculated how much of the lifetime allowance you have used up.
• Salary related pension schemes, a multiple of 20X the pension benefit entitlement is what is used.  E.g.  you have accrued a pension entitlement of £50,000 pa.  £50,000pa X 20 = £1,000,000 valuation for the purposes of the lifetime allowance calculation.

What if I exceed the lifetime allowance?

• If the pensions you have built up exceed the lifetime allowance, you face a tax charge of 55% of the excess.

Lifetime Allowance 2014 Reduction - A £137,500 Extra Tax Bill

The effect of reducing the Lifetime Allowance from £1.5m to £1.25m on 6th April 2014, could prove financially very costly.

The Lifetime Allowance is being reduced by £250,000.  This means that if you are affected and take no action to protect yourself, this would mean a tax charge of 55% on the £250,000 allowance lost = £137,500 Tax Charge.

What can I do to protect myself?

The Government has allowed that if you are already in excess of the new allowance, you can take action to protect yourself by Registering for Fixed Protection 2014 or Individual Protection 2014.

• If your pension fund value is already above £1.5m or £1.25m you need to take action now and consider registering for one of the above protection regimes.
• If your pension fund is close in value to £1.25m you may wish to take action before April 2014 to invest more in your pension fund to achieve above the £1.25m threshold to then allow you to register for a protected lifetime allowance.

1.  Lifetime Allowance Fixed Protection 2014.

Fixed Protection 2014 is basically the same as the fixed protection scheme for 2012 (when the Lifetime Allowance was reduced from £1.8m to £1.5m).

6th April 2014, Lifetime Allowance reduces from £1.5m to £1.25m.  You can protect your pension fund from this cut and the addition tax charges.

Fixed Protection 2014 is available to

• Those who have reached the lifetime allowance threshold of £1.5m
• It is not available to those who have already registered for previous lifetime allowance protection options such as Enhanced Protection (pension lump sums), Primary Protection for Lifetime Allowance of the Fixed Protection 2012.

What does Fixed Protection do?

You lock in your Lifetime Allowance at £1.5m and this may increase in line with CPI or other increases as the Government/HMRC allow in the future.

Can I still pay into investment linked/money purchase/defined contribution pension schemes?

• No, you cannot.  If you or your employer pays into any of the above pension schemes on your behalf, you immediately lose your protection. 
• You can however make payments into life insurance schemes that a set up inside the pension wrapper.

Can I still accrue additional pension rights under salary related pension schemes such as a Final Salary Scheme? 

• Yes, but any accrued benefits can only increase up to inflation measured as the Consumer Prices Index (CPI).
• If you accrue further pension rights due to an increase in your salary or increase in the number of years membership, you will lose your fixed protection.

You can register directly with HMRC for Fixed Protection 2014 by downloading their registration form.  This must be applied for by the end of the tax year in 2014 i.e.  5 April 2014.

Download  Fixed Protection Application Form.

Double Up Your Protection: Whilst registering for Fixed Protection, you can also after 6th April 2014 register for Individial Protection as a safeguard, just in case you lose fixed protection.  This is different to Fixed Protection 2012 or Primary Protection back in 2006, where this was not possible.

2. Lifetime Allowance Individual Protection 2014.

Individual Protection for the Lifetime Allowance 2014 reduction offers a new concept and option for many pension savers.

For other protection elements offered for previous changes such as Enhanced, Primary or Fixed Protection 2012, if you accrue further pension rights, you lost your lifetime allowance protection.

Individual Protection 2014 offers the facility to continue to build up pension benefits after registering for Individual Protection.

The Basic Rules

• Your pension fund must be valued at or exceed £1.25m on 5th April 2014.
• Your Individual Protection is set at the amount your pension fund is valued on that day.
• E.g.  If your pension fund is valued at £1.3m on 5th April 2014, your Personal Lifetime allowance is then set at £1.3m.
• E.g.  If your pension fund is valued at £1.6m on 5th April 2014, your Personal Lifetime allowance is then capped at £1.5m.
• You can still accrue pension rights e.g.  continue paying into pensions without losing your Personal Lifetime Allowance Protection under Individual Protection.
• This means that for those who have exceed the £1.5m threshold already, Individual Protection 2014 offers better protection than Fixed Protection 2014 because you can still pay into pension funds and not lose your protected Individual Personal Lifetime Allowance of £1.5m
• Pension savers that have already registered for the original Primary Protection cannot register but those with Enhanced or Fixed Protection can.  This proves a good fallback if Fixed Protection were to be lost.

Why would you carry on paying in or accruing pension rights?

We understand the argument that paying in or accruing further pension rights despite a potential tax charge at 55% for the excess over your personal lifetime allowance may not appear advisable.

The reality is that you can still continue to accrue pension rights and if:

• You lose your fixed protection you have a fall-back position of being locked into your Individual Protection Limit set at April 2014 and
• If the Lifetime Allowance does start to increase again in the future (which we hope it does) then you have still continued to accrue pension rights that may take advantage of any future Lifetime Allowance increase.

Not Quite at £1.25m?

Consider making additional contributions to pension now to take your fund value above £1.25m so that you can register for Individual Protection, so that you can continue to build up further rights.

When can I register with HMRC for Individual Protection?

You can register for Individual Protection with HMRC from 6th April 2014 when you know exactly what the value of your pension fund was on 5th April 2014..  Registration is possible until 2017.

Other Considerations After Registering for Individual or Fixed Protection

This Lifetime Allowance cut may force you to consider:

• Leaving your employer and resigning
• Staying with your employer but giving up "free" pension contributions from them.  How will you be compensated for this loss?
• Changing investment strategy to reduce potential for growth.
• Discussing alternative savings strategies if you can no longer invest in pensions
• Consolidating existing pensions to make them easier to manage.

Contact our team now for pension contribution advice and how to register for protection.