Pension Lifetime Allowance Changes 2016

On 6th April 2016, significant new pension legislation will come into effect that will markedly increase the number of pension savers and scheme members who may be affected by the lifetime allowance (the limit on value that may be saved within a pension scheme without incurring significant capital tax charges). The current allowance of £1.25m across all pension assets that an individual may hold reduces to £1m in April; capturing many more people that are prudently planning for retirement.

How might you be affected?

If pension assets and entitlements are deemed to be in excess of the lifetime allowance when benefits are taken, then a tax charge will be levied on the surplus at 55% of the excess if taken as a lump-sum or 25% if taken as income (which will then also be taxed at marginal rates as income in addition when benefits are taken). The tax charge can be triggered in a number of ways including taking income, lump-sums, transferring your pension overseas, dying or simply reaching age 75. You may have inspected your pension assets recently and taken the view at the time that there was plenty of head-room before the tax would apply. However, given rising markets in recent years and the allowance reducing from its peak in 2010 (see table below), additional attention may be warranted.

Lifetime Allowance History – 10 Years

2006/07          £1,500,000

2007/08          £1,600,000

2008/09          £1,650,000

2009/10          £1,750,000

2010/11            £1,800,000

2011/12            £1,800,000

2012/13            £1,500,000

2013/14            £1,500,000

2014/15            £1,250,000

2015/16             £1,250,000

——————————–

2016/17             £1,000,000

What can you do about it?

New protection is available in two forms to protect retirement savers affected by the changes in addition to 2014 Fixed Protection for a limited time:

2016 – Fixed Protection

If the value of your pension assets is below £1m at 5th April 2016, Fixed Protection 2016 will preserve a lifetime allowance of £1.25m for those who successfully apply for it. In order to maintain Fixed Protection 2016 all future pension contributions would have to cease and no future accrual would be permissible in defined benefit schemes.

2016 – Individual Protection

For those with funds/ benefits in excess of £1m at 5th April 2016, the value at this date will be protected up to £1.25m. Future accrual and ongoing contributions may continue.

2014 – Fixed Protection

It may be possible to preserve funds or benefits of up to £1.5m under a previous transitional protection arrangement from 2014 when the lifetime allowance reduced from £1.5m to £1.25m depending upon your circumstances. Similar to 2016 Fixed Protection, no further accrual or funding is permissible.

Other Points to note

If pension funding is approaching the stage where the lifetime allowance is a threat to the tax-efficiency of your retirement plans, consider funding plans on behalf of a spouse as an alternative.

Caution should be exercised if previous steps have been taken to address the lifetime allowance in the past. For example, primary or enhanced protection.

If you need advice?

If you believe that you may be affected by the lifetime allowance and would like further advice on how best to approach the subject, please get in touch for a confidential consultation. Broadly speaking, if your pension assets are valued in excess of £500,000 or you are aggressively funding your pension there may be a realistic prospect that you may be affected by this issue during your lifetime even after benefits have been taken initially. With a headline tax rate of 55%, financial planning advice will be worthwhile.

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