What is the lifetime allowance?
The lifetime allowance is the maximum amount you can accumulate in your pension fund before requiring to pay a charge for any excess. The government is reducing this lifetime allowance to £1.5m with effect from 6th April 2012.
What is the charge for exceeding the lifetime allowance?
The amount over the lifetime allowance will be subject to a lifetime allowance charge depending on how the excess is taken. If it is paid as a lump sum the charge is 55%. If it is paid as income then it is taxed at 25% (plus income tax at your highest marginal rate).
How does this affect me?
If the total value of your pension fund is currently over (or could potentially be over) £1.5m at or before retirement (from 6th April 2012) you may be subject to a tax charge of up to 55% on the excess if you do not have either Primary, Enhanced or Fixed Protection.
What is Primary and Enhanced Protection?
Primary Protection was previously available to individuals with a pension fund of over £1.5m on 5th April 2006. If you applied for this type of protection, you would have a personal lifetime allowance which will be higher than the standard lifetime allowance. This will increase in line with the increase in the standard lifetime allowance. Enhanced Protection was available whether or not the individual’s pension fund exceeds £1.5m on 5th April 2006. This will protect your pension fund against the lifetime allowance charge regardless of the size of the fund. However, one of the conditions of Enhanced Protection is that you have to stop paying contributions and accruing benefits into your pension plans.
Primary and Enhanced Protection are the two ways you could protect your pension fund accrued before 6th April 2006. These are no longer available and you should have received a certificate from Her Majesty's Revenue and Customs (HMRC) to confirm that these apply.
What is Fixed Protection?
Applying for Fixed Protection will allow you to accumulate up to £1.8m in your pension funds without a charge. This amount is secure on condition that no further contributions or benefit accrual will be made to any pension scheme. If this occurs, the Fixed Protection is lost and you will revert back to the lifetime allowance of £1.5m.
Who can apply for Fixed Protection?
There is no minimum level of pension fund required for Fixed Protection. Anyone with a pension can apply if their pension is or could potentially be over £1.5m at retirement from 6th April 2012. However, individuals with Primary Protection cannot apply. Additionally, individuals with Enhanced Protection only cannot apply unless they first give up this protection. Great care should be taken before giving up Enhanced Protection as once given up; you will not be able to re-apply for this protection.
How do I apply for Fixed Protection?
Application for Fixed Protection can only be made in writing to HMRC using form APSS227. This is available on the HMRC website. Online applications are not allowed. HMRC will issue a certificate once the application has been processed and approved.
What is the deadline for application for Fixed Protection?
HMRC must receive your application on or before 5th April 2012. Applications received after this date will not be accepted.
Should I apply for Fixed Protection?
If you are at risk of exceeding the standard lifetime allowance of £1.5m (from 6th April 2012) or are no longer likely to be contributing further to your pension, you may wish to consider applying for Fixed Protection. As Fixed Protection will mean no further contributions are allowed, this option should not be chosen by individuals who wish to contribute further or continue to accrue benefits in a non-contributory pension scheme. Likewise, this option does not need to be chosen by individuals who do not foresee themselves exceeding the lifetime allowance.
Great care should be taken in deciding whether to withdraw from employer sponsored arrangements, particularly those on a defined benefit basis. It is therefore essential that you discuss the matter with your Private Banker if you are considering applying for Fixed Protection.
What will my lifetime allowance be if I apply for Fixed Protection?
If you apply for Fixed Protection you will retain the lifetime allowance of £1.8m rather than the standard lifetime allowance of £1.5m in April 2012.
If the standard lifetime allowance rises above £1.8m in future, your Fixed Protection will cease and your lifetime allowance will then be the higher standard lifetime allowance.
If I applied for Fixed Protection, what happens if I make further pension contributions or accrue pension benefits from 6th April 2012?
If you accrue any pension benefits or make contributions into a new or existing pension scheme (whether personal or occupational) from 6th April 2012 then Fixed Protection will be lost. As a consequence, the standard lifetime allowance will then apply. You must tell HMRC if you lose Fixed Protection.
In addition, you will also be subject to restrictions on how and where you can transfer your pension funds otherwise you will also lose Fixed Protection.
How does Fixed Protection affect my tax-free cash entitlement?
Where Fixed Protection is held, the maximum tax free cash you are entitled to from your pension fund will be 25% of £1.8m (i.e. £450,000). If Fixed Protection is not held then the tax free cash will be 25% of the standard lifetime allowance of £1.5m (i.e. £375,000).
From 6th April 2012, individuals with Enhanced Protection will suffer a reduction in their maximum tax-free cash lump sum to 25% of the standard lifetime allowance (i.e. £375,000) unless a protected tax-free cash amount is specifically stated on the Enhanced Protection Certificate.
If you are considering taking your tax-free cash entitlement before April 2012, please contact your Private Banker in this first instance.
How will Auto-enrolment affect Fixed Protection?
Auto-enrolment will start from October 2012. This means that if your employer is subject to the auto-enrolment requirements they will have to automatically enrol you into a qualifying work place pension scheme. If you are claiming fixed protection you must opt out of such pension arrangement within one month or you will build up pension benefits which mean that your fixed protection will be lost.
N.B. This will also affect individuals with Enhanced Protection i.e. you will lose this protection if you build up pension benefits under auto-enrolment.
The information in this document is based on our understanding of the current legislation. It is provided only for general information purposes and is not intended to constitute tax advice. If you require specific tax advice, please contact your Tax Adviser or Private Banker.
