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Protecting yourself from the Pension Lifetime Allowance Reduction

The protection of funds that are currently (or may in the future) exceed the new Lifetime Allowance of £1.25million is a critical question for all pension holders.  An investor with £700,000 of pension fund in their 40’s or 50’s may easily exceed the £1.25million limit (coming into effect on 6th April 2014) before they retire, due to the effect of investment growth alone.  Additionally, many people may not have obtained up to date values for old final salary schemes, which (with revaluation applied to date and up to scheme retirement age) can easily exceed the Lifetime Allowance.  The reduced LTA would be entirely used up by a pension of £62,500 per annum.  With the tax on any excess over this limit standing at 55%, the ability to protect the highest possible LTA available is extremely important.

Further to policy statements made in the Autumn Statement and the Budget, HMRC have published draft legislation and a consultation in respect of Individual Protection 2014 (IP 2014).  This is a second form of protection for those at risk of a tax charge for exceeding the Lifetime Allowance when it reduces to £1.25million from 6 April 2014, which allows individuals to continue to accrue pension funds (or to reserve the right to in the future) and should be available as a ‘second tier’ protection in addition to Fixed Protection 2014 (FP 2014).

Some items to note from this consultation document are:

  • The consultation is explicitly excluding whether or not IP 2014 will be available (i.e. it is about implementation only).  This is a step up from the wording of previous statements, which confirmed an ‘intention’ to offer this type of protection.
  • There is the possibility that people with Enhanced Protection and no Primary Protection ‘backstop’ could elect for IP 2014.  Enhanced Protection holders whose funds did not exceed £1.5million at A-day, but may exceed £1.25million on 5th April 2014 should contact their advisers to consider opting for this.
  • It appears that you will not be able to apply for it until after 5 April 2014.  This presents practical issues in that FP 2014 must be applied for before 5 April 2014.  In one sense, this is logical as IP 2014 would require valuations at 5 April 2014 which would simply not be available at the time.  However, there may be additional work and 2 sets of forms to complete.

Please note that there are currently no forms available to apply for either form of protection.

The availability of two protections and the balance between them will require careful analysis by expert pension advisers to get right.  If you would like to discuss your position and your options, then please speak to one of our advisers.



Date: 18th June, 2013
Author: Tony Slocombe


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