Prepare for Reduction to the Pension Lifetime Allowance

As featured in the February issue of The Courier Business Matters Magazine

With a new tax year on the horizon, this generally brings new tax and legislative changes that individuals need to be aware of. Changes to pension legislation is one area that has been in the spotlight over recent years and 2016 is no different. One of the key changes that will impact many individuals is the fall in the Lifetime allowance from £1.25 million to £1 million.

If you are still accumulating your retirement provision, you’ll want to know what to do when the lifetime allowance reduces to £1m on the 6th of April 2016 and if this affects you. Whether you are deciding whether to continue accruing pension funds after April, or are retiring after April and are close to the £1 million limit, protecting your lifetime allowance means that you may be able to mitigate any potential tax charge that will be payable on funds in excess of the new threshold.

Even if you haven’t reached close to £1 million in your pension fund at the moment, it is important to consider future contributions and growth in the capital value of your pension fund and to take into account future career progression. Business owners holding their business premises within their pension fund, will also need to factor in the potential for uplift in property value by the time they retire and when the sale proceeds are paid to the pension fund.

If you want to protect the pension fund you have; and keep your lifetime allowance at £1.25m, and if you’ve not previously protected your pension funds, you’ll be able to apply for Fixed Protection 2016 or Individual Protection 2016.

You’ll need to know the total value of your pension savings including any pensions already in payment to assess whether protection is necessary for you. Although intended to be a simple process, this can be complicated if you have multiple pension arrangements in place.

Fixed Protection 2016 will allow an individual to keep a £1.25m allowance but they will have to cease contributions and pension accrual by 5th April 2016. Individual Protection 2016 will allow further contributions and provide a personal allowance that will allow the pot to grow to 1.25m for those with pension funds already worth more than £1m.

Any decision about Lifetime Allowance protection may also involve considering maximising contributions by 5th April 2016 before protection is applied for. Individuals will need to assess their available Annual Allowance plus any carry forward allowances from the previous three tax years when making contributions.

HMRC has confirmed that the new protection regimes will be applied for online. This will be available in July, but if you are retiring between April and July, and you want to rely on these protection regimes, there will be an interim process. Individuals will need to write to HMRC to apply between these dates and they will be given a temporary reference number which will only be valid until 31 July 2016. A full application will need to be submitted once the online application is available to ensure that your pension savings continue to be protected. HMRC has confirmed that they will be unable to process any applications for protection prior to April.

Any references to tax and legislation is based on our understanding of law and HM Revenue & Customs practice at the date of publication. Tax and legislation are liable to change. Tax relief may be altered and the value to the investor depends on their financial circumstances. The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. Investment entails risk which means the asset values can increase or decrease and you may not get back what you put in.

Contributed by Jonathan McDowall, Financial Planning Consultant, of Henderson Loggie Financial Services Ltd, which is authorised and regulated by the Financial Conduct Authority.