Rumours are circulating that the Chancellor’s Budget next week will contain dramatic changes to the existing structure of tax relief on pension contributions.
It is likely, according to speculation, that we may see tax relief on pension contributions being reduced or completely overhauled. The full implications of such a change can be considered another time, but there are changes coming that we do know about which will take effect from 6 April 2016.
These will include reductions to the Lifetime Allowance (LTA) and the tapering of the Annual Allowance. There will also be another set of protection options individuals will be able to apply for.
Reductions to the LTA
The LTA will be reduced from £1.25m to £1m and will increase in line with the Consumer Prices Index (CPI) from April 2018. In addition, two new protections are being introduced, namely Fixed and Individual Protection 2016.
How will these work?
Fixed Protection 2016 (FP16):
• Protects pension benefits up to £1.25m
• No further contributions can be made after 5 April 2016
Individual Protection 2016 (IP16):
• Must have benefits of at least £1m as at 5 April 2016 to apply.
• Protects pension benefits up to the individual’s protected amount (up to £1.25m).
• Can continue to contribute to the plan.
So what are the planning issues and opportunities?
A decision will need to be made as to whether protection should be applied for and if so which, or both.
Where the decision is to apply for FP16:
• What is the current size of existing pension savings?
• What is the investment strategy and can any assumptions be made on projected growth?
• Where benefits are at or near the LTA limit, will they grow more than the CPI-linked increases to the LTA from April 2018?
• How many years has the member got before they plan to retire?
• Should additional contributions be made before 6 April 2016?
Where the decision is to apply for IP16:
• Are pension savings already at or above £1m or do additional contributions need to be made before 6 April 2016?
• Should additional contributions be made before 6 April 2016 to take the individual protection limit as close to £1.25m as possible?
• Once the protection is in place, is the intention for future contributions to be employer-based, individual or both?
• If employer-based contributions only, is this more tax-efficient than taking additional remuneration in the form of salary, bonuses or dividends in lieu of pension contributions?
• Are the employer contributions excessive, compared to remuneration, and has consideration been given to the wholly and exclusively rules?
Many individuals will be members of Defined Benefit (DB) schemes.
Deferred members
