Finally, finally available HMRC Pension Lifetime Allowance Protection 2016

01 August 2016

It's been a long wait, but HMRC has now issued its pension Lifetime Allowance protection options online.

We have noted this forthcoming opportunity in our Chapters Financial Newsletters for some time and it is pleasing that this has finally arrived for those affected.

Details of the Lifetime Allowance and associated protection have been available on our website for some time and this can be found on the following page: http://www.chaptersfinancial.com/private-clients/pension-retirement-planning

It was quite un-nerving for some to know that HMRC Protection 2016 would be available, but that you could not secure it until after the event (05th April 2016), although you still had to comply with the various requirements. I understand that the HMRC pension tax system was being upgraded (unconfirmed) and this was the reason for the delay. Frustrating for many, but at least it is now available and the details, requirements and application can be found here:

https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance#individual-protection-2016

I believe you will have to open a Government Gateway account if you do not already have one.

2016 Protection

2 sorts of protection are available for 2016, as in previous options (2014 being the last time):

  • Fixed Protection 2016 to £1.25M

Where you want to protect pension benefits into the future to a level of £1.25M in value, even if they are below £1.0M as total accrued pension benefits at 05 April 2016.

No further pension contributions can be made on your behalf from any source after 05 April 2016 (this includes Auto-Enrolment/Workplace Pensions).

  • Individual Protection 2016 to £1.25M

Where total accrued pension benefits at 05 April 2016 exceeded £1.0M in value and you want to protect the amount accrued at that date (to a limit of £1.25M). Continued accrual of pension benefits is allowed, but you will only be protected to the amount you have accrued as at 05 April 2016. Any excess is likely to be taxable.

The HMRC Individual Protection certificate will provide you with an individual percentage allowance of the standard Lifetime Allowance and can be applied for online.

Future Inflation Increases

The current Lifetime Allowance limit is planned to increase in the tax year 2018/2019 in line with CPI. Legislation can and does change and it would be sensible to keep updated on limits if they change.

Example/Valuing Benefits

Otherwise, the new Lifetime Allowance limit is now £1.0M. To put this in context (and this is only an approximate example), if you have a final salary type pension, you multiply its income value by 20 to gain the value against the Lifetime Allowance. In this example, gross income above £50,000 pa at the time of drawing benefits in the future could be subject to a tax charge equivalent to 55%. This is normally charged to the pension scheme, with the corresponding income paid to the member being reduced to accommodate the HMRC charge.

Older type protection still available?

For those who have missed the detail on this pension protection and had accumulated benefits in excess of £1.25M at 05 April 2014, they still have time to apply for HMRC Individual Protection 2014 until early April 2017. More details can be found here:

https://online.hmrc.gov.uk/shortforms/form/IP2014?dept-name=&sub-dept-name=&location=36&origin=http://www.hmrc.gov.uk

Don't delay on this opportunity if available to you.

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Summary

It is unclear if the HMRC Lifetime Allowance for pension benefits will fall further than the new current limit of £1.0M and with other, bigger issues on the new Chancellor's mind, such as Brexit, this may not be a priority. However, he will still need to balance his books and this might be one opportunity. We plan to keep you posted via our website if we receive any new information.

In our experience, employers who offer team members significant pension benefits have in some instances been sympathetic to these limits, allowing existing pension contributions to stop, and for these to be paid as salary (this is not a recommendation or advice). It is important to check, if you want to look at this option, that no other benefits, such as protection covers (death-in-service) are lost if pension contributions cease. Some employers take a different view, however, and it is important that you take advice based on your individual circumstances and the team at Chapters Financial can help with your overall pension and financial planning.

Please contact our Guildford or Woking offices to discuss your individual needs and circumstances.

No individual advice is provided in the course of this blog.

Keith Churchouse FPFS
Director
Chartered Financial Planner
CFP Chartered FCSI
ISO22222 Certified

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.