Lifetime Allowance Reduction- April 2016

The UK Lifetime Allowance (LTA) will reduce to £1.0m from its current level of £1.25m on 6th
April2016. The LTA places a cap on the sum of UK tax relieved pension savings made during an individual’s lifetime. UK pension benefits are tested against the LTA when the pension scheme member commences drawing benefits or on death if sooner. A transfer from a UK scheme to a Qualifying Recognised Overseas Pension Scheme (QROPS) also provokes an LTA test.

When the test is performed and the value of the pension benefits exceeds the LTA, the excess (over and above the lifetime allowance) is immediately taxable at either 25% (where the balance is drawn as a taxable income stream) or 55% (where taken as a lump sum). In the case of a transfer to a QROPS any excess is always taxed at 25%.

The latest reduction in the LTA follows previous cuts made in 2012 (from £1.8m to £1.5m) and 2014 (from £1.5m to £1.25m).

To avoid existing savers being disadvantaged, HMRC has introduced two new forms of protection:-

1. Fixed Protection 2016
2. Individual Protection 2016

Fixed Protection 2016 (FP2016)

FP2016 allows the pension scheme member to retain their existing LTA entitlement of £1.25m after 6th April 2016 provided no further contributions are made to a UK Defined Contribution pension scheme from this date.

In the case of a Defined Benefit pension scheme, future benefit accrual is limited to standard
inflationary increases. FP2016 generally precludes active membership of a scheme after 6th April 2016.

Who is eligible?

Any pension scheme member who does not already hold the following variants of LTA protection:-

  • Primary Protection
  • Enhanced Protection
  • Fixed Protection 2012
  • Fixed Protection 2014

Any interim applications must be followed up with a formal online application from July 2016.

Individual Protection 2016 (IP2016)
How does it work?

IP2016 allows the individual to protect their LTA so that it is equal to the value of their pension savings on 6th April 2016 (capped at £1.25m). Unlike FP2016, future pension contributions or accrual will not invalidate the protection.

Who is eligible?
Any individual with UK pensions valued in excess of £1.0m on 6th April 2016 and who does not already hold Primary Protection or Individual Protection 2014.

Any interim applications must be followed up with a formal online application from July 2016.

When can I apply?
HMRC will not accept applications prior to 6th April 2016 with the online application facility to be made available from July 2016. Where urgent, applications may be made in writing between April and July 2016 and HMRC’s Pensions Newsletter 76 sets out the interim process and provides a useful template letter. This can be accessed via the following link:
https://www.gov.uk/government/publications/pension-schemes-newsletter-76-february-2016/pension-schemes-newsletter-76-february-2016

For further information and solutions to protect your pension scheme from the charge get in touch today.