Lifetime allowance (LTA)
Reduction in LTA from April 2016
The Chancellor of the Exchequer delivered his final Budget of this Parliament on 18 March 2015. The only change targeted at pensions this time around was the reduction in the Lifetime Allowance (LTA) from £1.25 million to £1 million with effect from 6 April 2016. Furthermore, the Government will index the Lifetime Allowance from 2018 in line with the Consumer Prices Index.
As 96% of individuals currently approaching retirement have a pension pot worth less than £1 million, this change will affect only the wealthiest pension savers.
Transitional protection for pension rights
Because of the lowering of the threshold, more individuals will be affected in future. The Chancellor has therefore announced that Transitional protection for pension rights already over £1m will be introduced alongside this reduction to ensure the change is not retrospective.
Further information, and links to the HMRC portal where scheme members can use the LTA online services, are provided in HMRC guidance: ‘pension schemes:protect your lifetime allowance’.
Annual Allowance
The Annual Allowance will remain at £40,000 for defined benefit schemes such as the Teachers’ Pension Scheme, but this could reduce to £30,000 in a tax year if a member accesses the new pension flexibilities on or after 6 April 2015 and contributes £10,000 or more to a Defined Contribution scheme.
The new career average scheme
Finally, HMRC have confirmed that the new career average scheme has to be registered as a separate scheme in its own right. This means that members who had previously applied and received Enhanced Protection, Fixed Protection 2012 and Fixed Protection 2014 could potentially lose this protection if they join the new scheme and start paying pension contributions.
If you think you might be affected by these changes, we recommend that you contact an independent financial adviser.
Scheme Members
If your pension savings are worth more than £1 million you may need to protect your pension savings from the lifetime allowance tax charge.
What is the lifetime allowance?
The lifetime allowance is the amount of savings you can take from your pension schemes without facing a tax charge.
The lifetime allowance is currently £1.25 million but is reducing to £1 million from 6 April 2016.
From 6 April 2016 if you take more than £1 million from your combined pension savings, you may face a tax charge.
How much is the lifetime allowance tax charge?
The lifetime allowance tax charge is
• 55% of any amount you take from your pension savings as a lump sum that is over the lifetime allowance and
• 25% of any amount you take from your pension savings as pension income that is over the lifetime allowance.
Do you know the value of your combined pension funds?
The lifetime allowance applies to the value of your combined UK registered pension schemes and some overseas schemes. Your pension scheme administrator(s) may already send you information that will help you to find out the value of your combined pension savings. If not you should contact your pension scheme administrator(s) for more information.
This information will help you if you need to apply to protect your pension savings from the lifetime allowance tax charge.
Do I need to do anything now?
If you are agreeing salary and pension contribution levels with your employer for next year, increases in contributions to your pension schemes based on higher earnings may mean you exceed the lifetime allowance.
You may need to act to protect yourself from a tax charge even if you are not yet nearing retirement.
If you have existing protection but know that you may lose this you may also need to consider whether to apply for the new protections.
What do I need to do to protect my pension savings?
From April 2016 you will be able to apply to HMRC for one of two new protections when the lifetime allowance is reduced. These will be known as fixed protection 2016 and individual protection 2016.
You will be able to apply for these new protections by using a new on-line self-service system which will be available from July 2016. The new self-service system is still being developed and we will provide you with more information on this in due course.
You can find more information about the reduction of the lifetime allowance in Pension Schemes Newsletters 72 and 73.
Pension schemes newsletter 72 - September 2015 - GOV.UK
Pension schemes newsletter 73 – October 2015 - GOV.UK
Your pension savings may already be protected
The lifetime allowance was introduced in 2006 and was reduced in 2012 and again in 2014.
Each time the lifetime allowance reduced, people who had already planned their pension savings on the basis of the higher lifetime allowance could protect their pension savings by applying to HMRC and should have received a certificate to confirm their protection.
However you may still be subject to the lifetime allowance charge if you lose this protection.
You can still apply for protection from the 2014 reduction in lifetime allowance until 5 April 2017. You can find more information about how to do this along with other information about the existing protections and when these may be lost at Tax on your private pension contributions - GOV.UK .