The standard lifetime allowance will be further reduced from £1.5m to £1.25m on 6 April 2014.
The allowance places an overall ceiling on the amount of tax-relieved pension savings that anyone without any existing lifetime allowance protection can accumulate over the course of their lifetime without incurring a tax charge.
To help combat this, however, a second tranche of ‘fixed’ protection will be made available to anyone regardless of the current value of their pension savings, who does not already have enhanced, primary or fixed protection 2012, and who expects that the total value of their pension savings (including the crystallised value of any pension benefits that have already been taken) after 5 April 2014 will exceed £1.25m.
The deadline for registering for Fixed Protection 2014 (FP14) is 5 April 2014, the effect of which will be to give individuals a fixed lifetime allowance of £1.5 million, until such time (if at all) that the standard lifetime allowance exceeds £1.5 million in the future.
In order to keep FP14 though, there must be no ‘benefit accrual’ and any transfer must be a ‘permitted transfer’
HMRC have published detailed guidance on what constitutes ‘benefit accrual’ and what a ‘permitted transfer’ is but in simple terms:-
• Permitted transfers will include those between money purchase schemes and transfers into a money purchase scheme from a final salary scheme; and
• No benefit accrual means that (i) Contributions to money purchase arrangements must stop and (ii) Accrual under a final salary scheme must be limited to Consumer Price Index (CPI) increases or some other increase as specified in the scheme rules on 10 December 2012.
If fixed protection is lost, it is the individual’s responsibility to inform HMRC and they will then revert to the standard lifetime allowance when testing whether or not they are subject to a lifetime allowance charge in the future.
To protect or not to protect – that is the question!
If you already have total pension rights valued in excess of £1.25m, or they are likely to exceed this level by the time all your benefits have been taken in the future, choosing FP14 in order to benefit from a fixed LTA of £1.5m may at first glance look very appealing.
It is important to remember though that opting out of a scheme in order to preserve FP14 will often mean giving up valuable employer contributions. If so, then unless you can be sufficiently compensated by your employer through some other means (such as a higher salary which, net of income tax and NI, would outweigh the projected pension benefits that you would otherwise be giving up net of a LTA charge) not registering for FP14 and paying a LTA charge could actually produce a better outcome.
Members of DB schemes in particular, with 5 years or more to go before retirement, may be better off remaining an active member – whereas registering for FP14 and opting-out before 6 April 2014 could be preferential for other member’s closer to retirement on the basis that revaluation in deferment on the accrued pension might give a better result than future accrual with a tax charge.
Other factors, such as the potential impact that opting out of a scheme could have on any death benefits would also have to be considered, and whilst each case will of course need to be judged on its individual merits, there should be circumstances where not registering for FP14 and remaining an active member of a pension scheme after 5 April 2014 could actually produce a better overall outcome despite the payment of a LTA charge.
Even if this is the case though, if you have total pension rights as at 5 April 2014 worth more than £1.25m, it should still be beneficial to register for another form of protection, called Individual Protection 2014 (IP14) if, as appears likely following a recent Government consultation, this will also be made available.
This is because anyone with IP14 can continue to actively save in a pension scheme after 5 April 2014 without losing this protection, but with the benefit of having an enhanced personal LTA that will be equal to the greater of £1.25m and the total value of their pension rights on 5 April 2014 (subject to an overall cap of £1.5m).
Assuming it gets the go ahead, we will discuss IP14 in another article, but with the deadline for registering for FP14 less than six months away, if you are a high net worth client with significant pension savings, the decision as to whether or not you should register for FP14 is clearly one that needs to be made very soon if it hasn’t already. And, if choosing FP14 does look suitable for you, consideration may also need to be given to other opportunities, such as whether or not it could be advantageous to make a ‘last minute’ top up to your pension funds before the door shuts in April and/or how ceasing pension funding could impact on how much extra money you may wish to redirect into your non-pension investments.
For further information on how the lifetime allowance changes may affect you please contact us directly. This article is for information purposes and by no means should be construed as advice. You should contact an Independent Financial Adviser to clarify any of the issues raised. Quest Financial Solutions do not take any responsibility for actions taken as a result of reading this article.