A: Legislation introduced in the Finance Act 2013 confirmed a reduction in the standard lifetime allowance from the previous £1.5m level to a reduced £1.25m from 6 April 2014. The cap applies to both UK registered pension schemes and qualifying overseas pension schemes on which payments into the scheme receive income tax relief.
The lifetime allowance will also apply to pension schemes where the individual does not directly make contributions; the most common type will be a workplace pension where only the employer makes payments. This will likely affect small, family companies and other such owner managed businesses.
If the allowance is exceeded, for example when an individual begins to draw on his pension after this date, a lifetime allowance charge will arise.
The charge will fall into two categories a 55 per cent tax deduction if the amount above the lifetime allowance is paid as a lump sum or a 25 per cent charge if it is taken as part of the ongoing yearly payments – in your client’s case this would be the additional £50,000 above the £1.25m.
The payment of the charge can either be made by the individual on his tax return or by the administrator directly.
Not all is lost if, at present, your client’s pensions schemes are already in excess of the reduced limits as it should be noted that FA13 introduced a protection known as fixed protection 2014, (FP14) which simply allows an individual to retain the higher £1.5m lifetime allowance. However, this comes at a cost of not being able to make any further contributions into his pension scheme after fixing his position.
In addition the Coalition Government has introduced a further protection known as individual protection 2014 (IP14). At present there is nothing to prevent both FP14 and IP14 being made.
IP14 can be claimed by any individual who is a member of a UK registered pension scheme or a relieved member of a relieved non-UK pension scheme. He must also have a ‘relevant amount’ (see your adviser to work out if this applies) greater than £1.25m and must not have opted for ‘primary protection’ back in 2006.
There is no equivalent restriction on applying for IP14 if an ‘enhanced protection’ claim was made at ‘A-Day’.
As this is a complex area and the ‘relevant amount’ requires calculation, it is always best to seek professional advice from your tax adviser before opting for an FP14 or IP14 claim.
Ben Chaplin is managing director of Taxwise
