The Lifetime
Allowance - Fixed Protection 2014 explained
Before
we go into the details of Fixed Protection 2014 it’s important to understand
the background and terminology involved.
The
lifetime allowance (often referred to as LTA) is the maximum amount of pension
saving you can build up over your working life. If you build up pension savings
worth more than the lifetime allowance you'll pay a tax charge on the excess
when you start to draw your benefits.
The
lifetime allowance tax charge is paid on any excess over the LTA. The rate
depends on how this excess is paid to you. If the amount over the lifetime
allowance is paid as:
·
A
lump sum - the rate is 55%
·
A
pension - the rate is 25% (with the taxed amount also being subject to income
tax at your highest applicable rate)
The
lifetime allowance has been as much as £1.8m in 2010-11 and 2011-12, but it
reduced to £1.5m in April 2012 and is set to fall to £1.25m for 2014-15.
When
the lifetime allowance was first introduced, and when it was later reduced,
individuals who thought they might be affected were able to apply for primary
or enhanced protection or Fixed Protection 2012 (either to keep their LTA at a
higher level or to fully protect their benefits in the case of enhanced
protection).
Similar
arrangements are in place for next year’s reduction in LTA – these are called
Fixed Protection 2014 (FP14) and Individual Protection 2014 (IP14). You can’t
have FP14 or IP14 if you already have primary or enhanced protection.
Fixed Protection 2014
Individuals
who’ve already built up tax-relieved pension rights of more than £1.25m, or who
think they may have more than that by the time they take their pension, can
apply for FP14.
If
you want to apply, you must notify HMRC by 5 April 2014. Individuals with FP14
will be entitled to a personal LTA of the greater of £1.5m and the standard LTA
(which will be £1.25m from 6th April 2014).
In
order to maintain FP14 individuals must not:
·
Have
a contribution paid to any of their money purchase schemes (examples include a
SIPP, Personal Pension or Stakeholder Pension)
·
Build
up new benefits in a defined benefits scheme (such as Universities
Superannuation Scheme) above a set amount
·
Join
a new pension scheme, unless you are only transferring pension savings from one
of your existing schemes into the new scheme
·
Start
saving in a new pension pot either under a new or an existing pension scheme,
including Auto Enrolment (see overleaf)
Individual Protection
2014 (IP14)
IP14
is an additional protection which is expected to be introduced. To be eligible
for Individual Protection 2014 individuals must have already built up
tax-relieved pension rights of over £1.25m by 5 April 2014.
Unlike
Fixed Protection, people who secure Individual Protection 2014 will be allowed
to continue pension saving after 5th April 2014 while protecting tax relieved
pension savings that have been accrued up to that date.
Individual
Protection 14 will enable individuals to protect the value of their savings as
long as they are above £1.25m but subject to a maximum of £1.5m. However any
savings accrued above £1.5m will be subject to the lifetime allowance tax
charge.
Applying for FP14 and
IP14
The
Government intends to allow a three-year period from 5th April 2014 for people
to apply for Individual Protection 2014 with the final date for applications
being 5th April 2017.
However, if you’re
applying for Fixed Protection 2014 you’ll need to apply by 5th April 2014 at
the very latest.
Application
forms for both types of protection will be made available on the HMRC website.
Risks for Active Defined
Benefit scheme members (Fixed Protection or Enhanced Protection)
Examples
of Defined Benefits Schemes include the Universities Superannuation Scheme
(USS). The problem with defined benefit accrual is that it often happens in the
background. You might not be aware that a pay rise, or the addition of another
year’s service, could take you over the allowed accrual rate. And by the time
it has happened, the damage is done and your protection will have been lost.
The
calculations to work out the acceptable level of DB scheme accrual are quite
complex, so if you’re an active member of a defined benefit scheme you should
seek advice as soon as possible to establish whether you’re likely to be
affected.
Auto-Enrolment Risk
Those
who secure Fixed Protection 2014, or who already have Enhanced Protection or
Fixed Protection 2012, must take great care to ensure that they opt-out of any
pension scheme into which they’re automatically enrolled. This must be done within the opt-out window.
Failure
to do so would breach the fourth bullet point above and consequently the loss
of Fixed or Enhanced Protection probably resulting in a hefty tax bill.
And finally…
As
is always the case with complex legislation such as this, it pays to seek
advice and to do it early.
A
professional financial planner will be able to advise you whether you should
consider applying for lifetime allowance protection.
And
don’t delay - April 2014 might seem like a long way off but contributions you
make now are counting towards that lifetime allowance calculation.
The contents of this article are for guidance only and do
not constitute financial advice. If you have any questions about the issues
features please contact us.
Call our friendly, knowledgeable team for a confidential, no obligation
discussion:
01527 880345
Visit our Website at: www.pps-vet.co.uk
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PPS Group is a trading name of Professional Practice Services which is
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