Lifetime allowance rules are changing...again!
What happens if I exceed the LTA?
From 6 April 2016, if at the time you take your pension benefits the value exceeds the £1 million LTA, you will incur a tax charge on the portion of benefits taken above this amount. This tax charge will be 55% if benefits are taken as a lump sum or 25% if paid as income, which itself is then subject to tax under PAYE rules.
Can I protect my pension savings if they exceed or are likely to exceed the LTA limit?
There are two sets of protection rules available which could help you to avoid paying a tax charge on pension savings in excess of £1 million after 6 April 2016 – Fixed Protection 2016 and Individual Protection 2016.
Various rules apply to each type of protection as outlined:
Fixed Protection 2016 (FP16)
If you already have LTA protection* then you will not be able to apply for this new LTA protection. FP16 will protect your savings up to £1.25 million after 2016. For FP16 to apply, you must stop building up benefits under every registered pension scheme you belong to from 5 April 2016.
FP16 will be lost if:
• you, or someone on your behalf, make pension contributions on or after 6 April 2016;
• your pension scheme has benefit accruals on or after 6 April 2016;
• a new pension is started – such as an auto-enrolment scheme.
Individual Protection 2016 (IP16)
If you already have Primary Protection or Individual Protection 2014, you will not be able to apply for IP16. To apply for IP16, you must have total pension savings of at least £1 million and no more than £1.25 million on 5 April 2016. The main difference in the two protections is that contributions into money purchase pensions and accrual under defined benefit schemes can continue. If you already have enhanced protection and apply for IP16, the enhanced protection rules will override those of IP16. However, if you lose enhanced protection, the rules of IP16 will then apply.
*Existing LTA protection includes Enhanced Protection, Primary Protection, Fixed Protection 2012 and 2014, and Individual Protection 2014.
How can I apply for these new protections?
You will need to notify HMRC prior to taking benefits if you wish to rely on FP16, whereas you have three years to apply for IP16. If you need to take benefits before July 2016, interim applications for protection must be applied for in writing between 6 April 2016 and 31 July 2016. After July 2016, everyone will need to make a full application using the HMRC digital online service which we have been informed will be available after July 2016.
If your application if successful, you’ll be given a protection reference number. Your pension provider will need this number when you want to start taking pension benefits.