Lifetime Allowance Charge: Don’t get caught out

What is the Lifetime Allowance?

Introduced in 2006 the Lifetime Allowance was originally set at £1.5million, it then increased over the following years to a maximum of £1.8million in 2010. Since then the allowance has reduced with the latest reduction in April from £1.25million to £1million being the third in four years.  It is estimated that this latest reduction will double the number of people being caught by the tax charge, as they have benefits over £1million.

The Lifetime Allowance applies to everyone, not just higher earners or those in a particular type of pension scheme. All pension benefits, whether defined contribution (also known as money purchase, such as personal pensions and many occupational pensions) or defined benefit (final salary) are included in the calculations.

Are you affected?

The test against the Lifetime Allowance occurs on a number of specified events, most frequently when pension benefits are drawn but can also apply at other times, for example, at age 75 in some circumstances.

Defined contribution pensions are tested against the value at the appropriate date, for example, when benefits are drawn. Defined benefit schemes are more complicated to value, although the usual test is to multiply the income payable by 20 and add on any additional tax free cash.

Pension benefits already in payment are also included in the calculation and will include benefits in payment before 2006 when the Lifetime Allowance was first introduced.

If your pension benefits are close to, or over £1million you are very likely to be affected by the latest reduction unless you have already taken steps to protect against the Lifetime Allowance.

For those with existing pensions below the £1 million allowance, consideration should be made as to whether this limit may be exceeded in future years. If so, action should be taken.

What are the options?

As in previous years, a number of options are available to help protect accrued pension funds from the reduction in the Lifetime Allowance:

• Fixed Protection 2016: This is only available if no contributions, whether yours or from your employer, have been made to any pension for you after 5 April 2016. You must also have opted out of any workplace pension (auto-enrolment scheme) by the 5 April 2016.  Fixed Protection will protect your Lifetime Allowance at £1.25million but would be lost if any pension contributions are made at any time in the future.
• Individual Protection 2016: If accrued pension funds amounted to £1million or more on 5 April 2016 you can apply for Individual Protection 2016. This will cap your Lifetime Allowance at the value of your pensions on that date, up to a maximum of £1.25million.  You and your employer can still continue to make pension contributions.
• Individual Protection 2014: It is still possible to apply for Individual Protection 2014 if accrued pension benefits amounted to £1.25million or more on 5 April 2014. Individual Protection 2014 will protect the Lifetime Allowance at the value of accrued benefits on that date up to a maximum of £1.5million.  Pension benefits can continue to be accrued without losing the protection.  Applications for Individual Protection 2014 have to be made by April 2017.

What if benefits exceed the Lifetime Allowance?

Whatever protection you apply for, you would be liable for tax on any excess above your protected allowance. Currently the Lifetime Allowance charge is 55% if benefits are taken as capital (not subject to income tax) or 25% if taken as income (which would be subject to income tax).

How do I apply for protection?

The online application process for all three forms of protection is now available through the following link: https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance. You will be issued with a certificate number which you should provide to your pension administrators or trustees to ensure they use the correct calculation when they apply a test against the Lifetime Allowance.

Where can I get further information or advice?

If your pension benefits are close to the Lifetime Allowance, or are likely to breach that level in the future, we strongly recommend you seek the advice of a qualified financial planner, ideally a pension specialist, to advise you on the most appropriate course of action for your personal position and objectives.

At Fiducia we have a very experienced team, including two pension specialists, who would be happy to discuss your options. Please do contact us if you would like to have a preliminary discussion as to how we may be able to assist.