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Kirk Rice Blog

What are the Lifetime Allowance Changes and How do They Affect Me? (Including Podcast)Written on January 28, 2016 by Peter Sharratt

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The Lifetime Allowance (LTA) is changing in April 2016 and there are some important changes. In this blog, we take a look at the most important aspects.  

This blog provides only a brief overview of the Lifetime Allowance, the changes due in April and the potential considerations for those affected to consider.  There is a lot more detail that we cannot cover in this short article. Therefore, if any of these issues affect you, contact us and we will be able to provide more specific guidance for your particular situation. Pensions and Tax rules are constantly changing and there will be another budget in March where we may see further changes.  It is vitally important therefore that you get detailed and tailored advice.


 

Listen to the audio version of this blog: 


 

What is Lifetime Allowance?

Lifetime Allowance is the amount of Pension Fund that you can accumulate without incurring a Lifetime Allowance Tax Charge.  Pensions are tested against the Allowance at the point you take them or age 75 at the latest.  There are also circumstances where your Pensions may be re-tested against the Allowance.

The LTA was originally introduced in 2006.  At that time it was a generous £1.5 Million and it was set to increase over time. Initially it did just that, reaching £1.8 Million in 2010.  At these levels it did not trouble too many people.

However, in 2012 as part of the Government Pension Reforms the Lifetime Allowance was reduced to £1.5 Million and, in 2014, it reduced again to £1.25 Million.  In April of this year, we will see a further (and hopefully final) reduction back to £1 Million.  At this level, it will impact a lot more people especially those in Final Salary Pension Schemes.

What is the impact of exceeding the Lifetime Allowance?

If your Pension is over the LTA, the excess is subject to the LTA Tax Charge.  The Tax Rate is dependent on how it is taken; A Lump Sum is taxed at 55% whereas income is taxed at 25%.  On the face of it, the income option appears to be more tax efficient.  However, it is then subject to Income Tax, at your marginal Rate.  If you are a 40% Tax Payer the overall Tax equates to 55% – so lump sum or income makes no real difference.  However, if you are a Basic Rate Tax Payer the overall tax equates to 40% and, in this instance, the income option is more tax efficient.

One final point to be aware of is that it is not possible to take a Pension Commencement Lump Sum from any amount over the Lifetime Allowance. It is all taxable.  The Pension Commencement Lump Sum was formerly called the Tax Free Lump Sum.  This is usually 25% of the fund value.

What can be done to minimise the impact of the drop in the Lifetime Allowance?

When the LTA previously reduced, the government recognised that some Pension savers would be affected and they put in place ’protections’ for which individuals could apply.  The finer detail of the protections available for the April change are not known at the time of writing this blog. Broadly, they are expected to be similar to those offered in 2014.  At that time there were 2 protections; Individual Protection 2014 and Fixed Protection 2014.

Individual Protection 2014 could be applied for and indeed still can be applied for until April 2017.  To qualify for this, your Pension needed to have a value as at the 5 April 2014 of more than £1.25m.  Your individual Protection would then be the value as at the 5 April 2014. If for example your Pensions were worth £1.4 Million on this date, this would be your Lifetime Allowance.  The maximum Individual Protection 2014 allowable is £1.5m as this was the LTA prior to the reduction in 2014.  The main advantage with Individual Protection is that Contributions, or in the case of a Final Salary Pension Scheme, Relevant Benefit Accrual can continue.  If you have not done so already you should get a valuation of your Pension as at the 5 April 2014 as you may be eligible for Individual Protection. You have until the 5 April 2017 to apply.

Individual Protection 2016 will be available to anyone with a Pension worth over £1m and the maximum Individual Protection will be £1.25m.  This will be based on the value of your Pensions on 5 April 2016.  Once again, contributions and relevant benefit accrual can continue.  Registration for Individual Protection 2016 can be done online from July 2016 and apparently there is no deadline.

Fixed Protection 2014 had to be applied for by 5April 2014 and so we won’t dwell on this in this article.  Fixed Protection 2016 is available to anyone (unless they have applied for previous protections).  This will fix their LTA at the current £1.25 Million.  But contributions or Benefit Accrual will have to cease by 5April 2016. If they do not, or if contributions are restarted at a later date, Fixed Protection 2016 would be lost.  Savers would revert to the standard Lifetime Allowance.

Registration for Fixed Protection 2016 can also be done online from July 2016 and there is also no deadline which is great news.  However, please remember Contributions MUST cease by the 5 April 2016 and, if you are in a Final Salary Pension Scheme, you will need to opt out by then also.  Anyone considering this should get advice first. You can contact a Kirk Rice Pension adviser here.

For those not who are not eligible or want to continue paying into a pension please read Part 2 of this blog: Lifetime Allowance Changes – Your Options.

Would you like to learn more?  Read about our Pensions and Retirement Planning services.


 

If you would like more advice regarding this issue or any other financial services matter, please contact us.


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The value of investments and income, if any, may go down and you may not get back the original amount invested.  Investment in smaller companies should be considered higher risk than is customarily associated with funds investing in larger, more established companies.  Sudden above average price movements and valuations can be expected.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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