From 6th April 2012, there will be a reduction in the pension lifetime allowance (LTA) from £1.8m to £1.5m.
The lifetime allowance is the amount you can build up in your pension fund without paying an additional tax charge. If you exceed the lifetime allowance when you come to take benefits, you will be subject to a lifetime allowance charge on the amount over the lifetime allowance depending on how the excess is taken. If it is paid as a lump sum the charge is 55%. If it is paid as pension income then it is taxed at 25% (plus income tax at your highest marginal rate).
If you have registered for Enhanced Protection you will remain exempt from the LTA tax charge.
If you have registered for Primary Protection; your personal lifetime allowance will still be calculated using the protection factor and an 'underpinned' lifetime allowance of £1.8 million. Any pension funds over your personal lifetime allowance will be taxed accordingly.
If you do not have either Primary and/or Enhanced Protection you may be liable for a tax charge of up to 55% on the excess above £1.5m when you come to take benefits from 6th April 2012.
If you started taking an income directly from your pension fund (known as Drawdown Pension) after 5th April 2006, you will be subject to a 2nd lifetime allowance test when you decide to buy an annuity or reach the age of 75. An example would be an individual who has used Drawdown Pension to provide tax-free cash and opted to take no income.
Fixed Protection is a new form of protection which is available to individuals that do not have Primary (or Enhanced) Protection and whose pension fund is already above (or could potentially be above) £1.5m at or before retirement.
If you apply for Fixed Protection you will have a personal lifetime allowance of £1.8m from 6th April 2012. This means that the lifetime allowance charge will be applied to benefits above £1.8m rather than £1.5m when you come to take benefits.
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).
If you were a member of an occupational pension scheme and entitled to tax-free cash of more than 25% of your pension fund then from 6th April 2012, the calculation will continue to be based on £1.8m rather than the standard lifetime allowance £1.5m. This will continue until the standard lifetime allowance rises above £1.8m.
By taking advantage of ‘Fixed Protection’ you have the potential to mitigate the excess lifetime allowance tax charge but you have to stop paying contributions and accruing benefits into your pension plans from 6th April 2012.
If you wish to apply for Fixed Protection and you are an active member of an employer pension scheme such as a Final Salary scheme i.e. you are still working for that employer and accruing benefits, you should speak to your employer or scheme administrator. Great care should be taken in deciding whether to withdraw from employer sponsored arrangements, particularly those on a defined benefit basis.
Applications for Fixed Protection must be made by 5th April 2012 and will take effect from the 2012/13 tax year. All applications must be made in writing to Her Majesty's Revenue and Customs (HMRC) using the HMRC form available.
If you consider that you may be affected by the reduced Lifetime Allowance, please refer to the Questions and Answers which has further information to help you decide whether you need to take any action. Alternatively, please contact your Private Banker in the first instance.
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.
