What is it?

The Lifetime Allowance (LTA) was introduced by HMRC in 2006 set at a level of £1.5million. This was established in order to limit the total value of payouts from pension schemes – whether lump sums or retirement income – that could be made without triggering an extra tax charge.

It then increased each year to 2010 when it reached £1.8million. However since 2010 there have been a number of reforms which have led to the Lifetime Allowance being significantly reduced. Its current level is £1million (2016/17). As a result this will push many unsuspecting people into a situation where their benefits will be subject to an additional penalty tax.

As pensions are normally a long term commitment, what may appear to be a generous allowance could quite easily be exceeded by the time you take your benefits.  It is therefore important to consider whether your benefits might exceed the Lifetime Allowance at retirement.

Will I be affected?

In the case of money purchase pension arrangements the position is fairly clear.

If you have a pension fund likely to be in excess of £1million by the time you draw your benefits (taking into consideration growth and additional contributions), then you will trigger an extra tax charge.

If you have benefits in a final salary scheme things are more complicated. These types of pension benefits are normally valued by multiplying the expected pension income by a factor of 20 and adding in any tax free lump sums paid in addition to the pension.

What is the charge?

If the combined value of your pension benefits exceeds the Lifetime Allowance when you access the funds there will be a tax on the excess – the Lifetime Allowance charge.

What charge applies depends on whether you take the excess benefits as income or lump sum.

Any amount over your lifetime allowance which you take as an income attracts a Lifetime Allowance charge of 25%. This is in addition to any tax normally payable on the income.

Any amount over your Lifetime Allowance taken as a lump sum is taxed at 55%.

Protection from the Lifetime Allowance

HMRC have introduced two new forms of protection to help those affected by the most recent fall in the pension lifetime allowance. Lifetime Allowance protection is designed to help investors who have built up pension pots in line with previous rules to prevent paying the tax charge. The protection will effectively allow them to benefit from a Lifetime Allowance higher than £1 million when drawing their pensions.

The two new forms of protection available are Fixed Protection 2016 and Individual Protection 2016.  In addition, Individual Protection 2014 is still available until April 2017 for those people affected by the last reduction in the Lifetime Allowance from £1.5m to £1.25m.

The key difference between the two forms of protection is that you can continue to contribute and accrue benefits with Individual Protection whereas Fixed Protection will be lost if further benefit accrual takes place or any further contributions are made.

Individual Protection could therefore benefit someone expecting further employer contributions or who wishes to retain  the flexibility to top up their pension should it fall in value. Fixed Protection might benefit someone with less time until retirement not looking to add any more to their fund.

It’s important to realise that the protection regime is complicated and there are various factors to consider when deciding on what form of protection may be most appropriate.  If you are in any doubt you should discuss the protection options with an Independent Financial Planner.

What should I do now?

Lifetime Allowance and the protection options is a complex area, and the right solution for you will depend on your personal circumstances. If you think you may be affected seek independent advice in good time as this will give you and your planner time to carry out the necessary research and calculations to ensure you make the right decisions.

If you would like to discuss anything contained in this article, please contact a member of our Wealth Team by email on enquiries@jcwealth.co.uk or your usual local office Financial Planner.

Nothing in this communication constitutes advice to undertake a transaction and professional advice. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

Disclaimer: While all possible care is taken in the completion of this blog, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm.