How to protect your pension savings from the reduced £1m lifetime allowance

As discussed in our previous blog, as of 6 April 2016 the government will introduce a reduction in the lifetime contribution allowance (LTA) from £1.25m to £1m. This will happen alongside a tapering of relief for those earning £150,000 per annum and over.

Following this reduction announcement, the Finance Bill 2016 has made provisions for transitional protections for pension scheme members who may need to protect their pension savings from the lifetime allowance tax charge once the new lower limit comes into effect.

There are a number of options available to savers, depending on the value of their pension savings as they currently stand.

If your pension savings are already over £1.25 million, then you may still be able to benefit from Individual Protection 2014 (IP2014), which is available to apply for until 5 April 2017. This means that you would have your own personal lifetime allowance set at the same value of your pensions savings as at 5 April 2014 up to a maximum of £1.5 million (what the LTA limit was between 2012/2014).

Looking ahead to the new £1m limit, if you think your pension will exceed this amount at 6 April 2016, there are two new forms of protection that will be available for UK residents with total pension savings in excess of £1 million or who they think will have pension rights worth over £1 million by the time they take their benefits. The two forms of protection are:

• Fixed protection 2016 (FP16) and
• Individual protection 2016 (IP16)

Both will operate in a similar way to FP2014 and IP2014 and individuals can apply for both FP16 and IP16, with FP16 taking precedence over IP16.

For those individuals who obtain FP16, their LTA will stay at the current level of £1.25 million but will only remain valid if they cease to contribute to pension schemes in the future.

For those who obtain IP16, their LTA will be set at the value of their pension savings as at 5 April 2016. Their savings must be over £1m to apply and will be subject to an overall limit of £1.25 million.

It was announced in the Autumn Statement that a new online application system would be launched in July for those wishing to obtain IP16 or FP16. However because the new service is not available until the summer, interim measures will be implemented for those individuals wishing to apply for FP16 and IP16 between 6 April 2016 and when the new system goes live, to give individuals temporary protections.

The interim process requires scheme members to contact HMRC in writing with details of their intention to rely on either IP2016 or FP2016. If either protection is issued between 6 April 2016 and when the online system is launched, individuals will need to complete the full application process online to ensure their protection continues. If they do not reapply, the temporary protection will lapse once the new system comes into force and any pension savings over the new lower limit will be subject to a LTA charge, which currently stands at 55% for if the money is taken out as a lump sum or 25% if taken as a taxed income.

If you have any concerns over the new lifetime allowance reduction, or would like to discuss your current pension plans, please contact your Finura Partners advisor.