As
announced in the 2012 Autumn Statement, the Lifetime Allowance for pensions
will reduce to £1.25m with effect from the 6th April 2014. As
previously notified in Target (June
2013) the government has introduced a Lifetime Allowance
protection regime, similar to the 2012 scheme. To remind you, there are two
types of protection available – Fixed Protection 2014 and Individual
Protection 2014. Individuals may apply for one or both levels of protection,
depending on their individual circumstances.
The granting of Fixed or Individual Protection 2014 will automatically
result in the loss of any existing protection which may already be in place.
In most cases, this will not be in a client’s best interest, as the previous
protection regimes offer a higher level of pension protection.
It is no longer possible to apply for Primary, Enhanced or Fixed
Protection 2012.
Fixed
Protection 2014 – The Details
When is it available?
- Fixed Protection is available now, but must be
applied for by 5th April 2014.
Who should apply?
- Anyone with a pension pot which is already in excess
of £1.25 million, or is likely to be so by the time they reach their
chosen retirement age, should consider applying for Fixed Protection
2014
- Also, anyone currently in Income Drawdown, who has
used all, or most of their Lifetime Allowance %, and who anticipates
having unused drawdown funds at age 75, which may give rise to a
Lifetime Allowance charge (see below)
What benefit do I receive?
- Fixed Protection 2014 will give you a personal
Lifetime Allowance of £1.5 million. In the event of the statutory
lifetime allowance increasing above £1.5m, the higher limit will apply.
My fund is currently less than £1.25 million. Is there any
restriction on applying?
- Anyone may apply for Fixed Protection 2014, if they
feel their pension fund is likely to be in excess of the standard
lifetime allowance at their retirement date. However, it is a condition
of being granted Fixed Protection 2014, that no further benefit
accrual may take place. This will effectively ‘freeze’ the value
of your pension pot at today’s value, with only future investment growth
and inflation linking being permitted (see below).
- For a money purchase scheme, any future growth will
therefore be limited to investment growth achieved by the fund. For a
Defined Benefit, or final salary, scheme, future benefit entitlement
will mostly be limited to ‘inflation proofing’, but some salary related
increases may also be permitted.
What if I, or my employer, make any future pension
contributions?
- In most cases, any further contributions to a
registered pension plan will result in the loss of Fixed Protection
2014.
- Should the entitlement to Fixed Protection 2014 be
lost, responsibility for reporting this to HMRC lies with the
individual. Failure to do so may result in a fine.
What about Auto Enrolmemt?
- If you apply for Fixed Protection 2014, and are
subsequently ‘auto enrolled’ in a workplace pension scheme by your
employer, you must opt out of the (auto enrolment) scheme, in order to
retain your Fixed Protection. By opting out, any premiums collected from
you and paid into a workplace pension will be refunded to you, and you
will be deemed to have never joined the workplace pension
What about Life Cover?
- If your pension plan includes death benefit
protection, provided such contributions are either not tax relievable,
the policy was in place before 2006, or otherwise qualifies under
‘protected policy’ status, Fixed Protection will not be lost.
What about Drawdown Contracts?
- If you have ‘uncrystallised funds’ which have NOT
been designated into drawdown (ie tax free cash has not yet been taken
from the fund), you may be affected by the reduction in LTA. This will
depend on the value of your uncrystallised funds and your remaining
lifetime allowance %. You may wish to consider applying for Fixed
Protection 2014 to protect the balance of your fund against a future LTA
charge.
- If you are already fully in drawdown, but do not
anticipate fully annuitising or drawing your funds before age 75, you
may be subject to a future LTA charge (BCE 5A). The value of your
remaining drawdown fund will be compared at your age 75 against the original
crystallisation value, and investment growth tested against your
remaining LTA entitlement (based on the Lifetime Allowance at your age
75). Any excess will be subject to a LTA charge. If you used a
significant % of LTA when designating funds to drawdown (or from vesting
any other pension benefits), you may wish to apply for Fixed Protection
2014 to protect against a possible future LTA charge at age 75.
- Funds fully placed in drawdown before April
2006 will not be affected by the reduced Lifetime Allowance.
Individual
Protection 2014
What if I want to make further pension contributions?
- In recognition of the fact that some individuals may
already have a pension fund in excess of the new, lower, lifetime
allowance of £1.25 million, but may still wish to contribute to pension
planning (or remain a member of their defined benefits pension scheme),
the Government is also introducing Individual Protection 2014. This can
be applied for after 6 April 2014
How does Individual Protection 2014 work?
- Although formal legislation is not yet in place, the
Government is proposing to allow individuals with existing pension pots
up to the value of £1.5m to continue to contribute to pension planning.
- Individual Protection 2014 (IP14) will protect the
level of any accrued pension savings at 5 April 2014 (subject to a
maximum £1.5m), but will allow further pension savings to be made. This
is different to Fixed Protection 2014, which does not permit ANY further
pension contributions to be made.
- An individual may apply for both FP14 and IP14, but
FP14 will be lost if any further pension contributions are made.
When is IP14 available?
- The intention is for IP14 to be available from 6
April 2014 (the deadline for applying for FP14 is 5 April 2014). It is
anticipated IP14 will be available until April 2017.
Is there any point in applying for Individual Protection
2014?
- In its Consultation Document for Individual
Protection, published in June 2014, HMRC noted: ‘The option of IP14
would therefore be of particular benefit for those who want to continue
saving in their pension scheme after 5 April 2014, albeit that they
would normally have a lower LTA than with FP14 and will be subject to
LTA charges on the additional savings. IP14 may also be beneficial to an
individual whose employer normally contributes towards their pension
scheme but, if the individual opted out of the pension scheme, they
would not be able to receive the value of those employer contributions
in another form such as higher pay. In such cases they may prefer to
remain an active member of the scheme and continue to receive the
benefit of the employer contributions, albeit that these will be subject
to an LTA charge when benefits are taken.’
- It is intended that Individual Protection (or
personalised protection) will give individuals a lifetime allowance of
the greater of the value of their pension rights on 5 April 2014 (up to
an overall maximum of £1.5 million) and the standard lifetime allowance
(£1.25 million from April 2014). This personalised LTA will remain at
that level unless the standard LTA rises above this figure, in which
case the higher LTA will apply. Thus, whilst protecting existing pension
benefits at the 05/04/14 value, the individual will be able to continue
to contribute to pension planning, in expectation of the LTA increasing
above the level of their personalised LTA in the future. This strategy
may be appropriate for younger individuals with some years to go until
their intended retirement age, who might reasonably expect the LTA to
increase in the meantime.
- Should the LTA not increase, the value of any pension
benefit in excess of the applicable LTA, or the Individual Protection
level (if higher) will be subject to a Lifetime Allowance charge on
vesting. This is currently 55% of the value of the excess fund if taken
as a lump sum benefit, or 25% of any retirement income amount (in
addition to any income tax applying).
- The time limit for applying for Individual Protection
2014 is expected to be three years (ending 5th April 2017).
- In the event of an individual being granted both
Fixed Protection 2014 and Individual Protection 2014, Fixed Protection
will take precedence.
How do I apply for 2014 Protection?
- Both Fixed Protection and Individual Protection may
be applied for on-line, via the HMRC website. Downloaded paper versions
of the application may also be submitted by post.
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