Don't get trapped by the new Lifetime Allowance
If you’re fortunate to have pension savings worth over £1.25 million, you should act now to sidestep a potential £137,500 tax bill.
What’s happening to the Lifetime Allowance?
From April 2014, the maximum amount of pension savings you’re allowed to build (before it becomes subject to additional taxation) reduced from £1.5 million to £1.25 million. According to HM Revenue & Customs an estimated 360,000 individuals could be affected.
The Lifetime Allowance is effectively a ceiling that applies to the total of all the pension savings you can have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.
It was originally introduced by the government in 2006 to limit the amount of tax relief being paid out. But with the gradual paring back of the Lifetime Allowance, many hundreds of thousands are now being caught in the net.
The Lifetime Allowance is effectively a ceiling that applies to the total of all the pension savings you can have
Who could be affected?
Even if you think the reduced limit of £1.25 million sounds like a huge sum, you should consider the possibilities carefully. If you’re a long-standing member of a final salary scheme, or have many years’ worth of accumulated wealth in a defined contribution plan you could be unwittingly caught up.
If you’re in a defined contribution scheme, a pension pot of a few hundred thousand pounds could grow to more than £1.25 million by retirement age given a run of favourable investment returns over a number of years.
If you’re an active member of a defined benefit scheme, like a final salary scheme, you will be affected by the Lifetime Allowance if your projected pension at retirement exceeds £62,500.
Members of public sector schemes, like the NHS Pension Scheme, will be affected if their projected pension exceeds £54,347.
It’s not too late to apply for Individual Protection
If the value of your pension savings on 5 April 2014 exceeded the new £1.25 million limit, you can apply for ‘Individual Protection 2014’ (IP14) to protect pension rights up to a maximum of £1.5 million (the previous limit). This gives you the opportunity to save up to £137,500 in potential tax charges.
For example, if you have pension rights worth £1.4 million at 5 April 2014 you will be able to have £1.4 million as your individual lifetime allowance through IP14. If you have pension rights worth £1.6 million you will be able to have £1.5 million as your individual lifetime allowance.
If the value of your pension savings on 5 April 2014 exceeded the new £1.25 million limit, you can apply for ‘Individual protection 2014’ (IP14)
The closing date for IP4 applications is 5 April 2017, but you should avoid deferring your application as it could take time for some administrators to produce back-dated valuations. Individuals who have already been granted Enhanced or Fixed Protection should also consider applying in case they lose their form of protection in the future.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.