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Pension: Reduction in Lifetime Allowance - Autumn Statement

The Lifetime Allowance (LTA) is due to be reduced further from its current level of £1.25 million to £1 million with effect from 6 April 2016. Inevitably more pension savers will face tax charges at retirement if their funds are in excess of the LTA.

Details of the transitional protections are now available for pension savers who wish to protect their funds from the forthcoming reduction. Although these protections are broadly similar to those previously provided, the application process is different this time.

There are two types of protection: Fixed Protection 2016 (FP2016) and Individual Protection 2016 (IP2016):

With FP2016 the LTA of £1.25 million is secured and an application can be made at any time but no further pension contributions can be made. Individuals must therefore take great care to avoid being auto enrolled into company pension or death in service schemes.

The alternative protection, IP2016, can only be applied for by those with pension funds valued in excess of £1 million on 5 April 2016. These savers will be able to fix their own personal LTA at the value of their pension funds on this date (with maximum protection of £1.25 million). Unlike FP2016, pension contributions can continue to be paid whilst holding this protection. Whilst that retains flexibility consideration would have to be given to the benefit of paying further contributions given the potential LTA charge at retirement.

Unlike previous arrangements, it is helpful that both protections do not have a fixed application deadline. Savers can simply apply for the protection at any point before taking pension benefits. The applications can be made online from July 2016 and will be acknowledged with a reference which will need to be quoted when taking benefits.

These changes are imminent. They mean that investors must take great care when planning large pension contributions to avoid the benefits of income tax relief and efficient investment growth being clawed back by the tax charge on retirement. For those with large pension funds taking benefits before age 75, they will face the first LTA test at that time. They will then face a second LTA test at age 75. This will require balancing the level of income withdrawals they need to take to avoid the LTA charge at 75 against retaining the value of the pension wrapper for future income or estate planning.

If you would like to discuss this further, please contact Iain Muffitt or your usual Mercer & Hole contact

 

 

Date: 26th November, 2015
Author: Iain Muffitt - Financial Adviser

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