Pension Lifetime Allowance 2016

Pension Lifetime Allowance 2016

The lifetime allowance is the maximum that individuals can build up in pensions savings pots throughout their lifetime. If you exceed the lifetime allowance you face a tax charge. The lifetime allowance was introduced in 2006 at £1.5 million, it then gradually increased to £1.8 million over the next four years and since then was reduced in 2012 to £1.5 million, £1.25 million in 2014 and falls again on 6 April 2016 to £1 million.

Over the years, where people have been affected by the reduction in the lifetime allowance because they have significant pension funds built up, you have been allowed to register for various types of protection if you were already at the point of exceeding any reduced limit. Originally we had enhanced protection to protect larger tax-free cash lump sums and primary protection for larger pension funds overall. This was then changed to fixed protection 2012 where people had pension funds in excess of £1.5 million, to protect themselves when the lifetime allowance was reducing to £1.5 million and currently we have both fixed protection and individual protection to protect those who have pension funds in excess of £1.25 million given that last year the lifetime allowance reduced to £1.25 million. Depending upon the lifetime allowance protection that you have, some people are not allowed to accrue any further pension rights and latterly with individual protection some people are allowed to build up some rights from schemes that are already in place.

Given the further reduction in the lifetime allowance to £1 million with effect six of April 2016, even more people will be affected.

In 2016, pension savers will again be offered both fixed protection and individual protection.

• Fixed protection 2016 will be the same as before whereby you register to keep your lifetime allowance at £1.25 million (index linked) despite the fall of the allowance to £1 million on the condition that you accrue no further pension benefits. In short, this means you can no longer pay into a pension fund nor can you accrue benefits via your employer. This means that many employees may leave their pension scheme or indeed be forced to leave their employment.

• Individual protection 2016 will also operate in a similar manner to individual protection 2014 where provided you have pension savings in excess of the £1 million, you can register for individual protection and continue with existing funding to your pension scheme plus any investment growth that is achieved.

How do I work out the value of my pension?

For Private investment linked pension schemes such as personal pension plans, self-invested personal pension plans and stakeholder pensions as well as defined contribution, occupational/company money purchase schemes it is straightforward to work out the value of your pension fund, as it is simply the fund value.

For defined benefit, final salary and all career average salary pensions the calculation is different. When you receive your pension statement it will give you an accrued pension income value that you will receive on a per annum basis. Your statement should read something along the lines of: "projected pension income £25,000 per annum". To work out the value of this pension for lifetime allowance purposes you will need to multiply the annual pension income by twenty times (x 20), meaning that for an accrued pension of £25,000 per annum x 20 = £500,000 of your lifetime allowance has been used.

No need to register for lifetime allowance protection 2016

HMRC is considering simplifying the registration process for pension lifetime allowance protection.

Given the sheer volume of pension savers that will be affected by this both now and in the future, HMRC appeared to be making life easier not just for savers but also for their own administration by considering removing the requirement to formally apply for fixed and individual protection. When talking with HMRC we have always found their standard position is "the facts are the facts".

Therefore, if you have already exceeded the £1 million pension saving allowance and continue to accrue benefits and growth within your existing schemes only then individual protection should automatically apply. The saying goes for fixed protection, if you wish to retain the £1.25 million fixed protection limit before it reduces to £1 million, provided you accrue no further pension benefits after 6 April 2016 then again, it makes sense for this automatically to apply.

Warning: taking no advice on LTA may cost you

A word of caution: HMRC, if they decide to remove the requirement to register for protection 2016, of very much putting the onus on you to be aware of pension law. If you do not take advice, you could find yourself landed with larger tax bills when you come to draw your pension benefits.