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Action to be taken before next reduction in LA

Ben Chaplin

Q: My client has heard that Revenue & Customs is again lowering the level of the maximum pension contributions he can make in his lifetime. Is this correct?

A: The government has announced a further reduction in the Lifetime Allowance for pensions commencing 6 April 2016. This will be the third reduction in four years and will see the limit drop from £1.25m to £1m. Legislation for this reduction will appear in the Finance Bill 2016.

This latest decrease will now see the limit at a level less than half that originally intended when it was to be inflation-linked from 2011/12. While the announcement of planned linking of the lifetime allowance to the consumer price index from 2018 will offer a little compensation to those affected, this is still some years off.

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In fact it is estimated that the latest reduction will double the percentage of those approaching retirement from 2 per cent to 4 per cent of savers but with many more at risk in the future.

Clients who have already exceeded the £1m limit (but not the £1.25m so have not taken any action following the 2014 reduction) and those who are closing in on the new reduced limit will need to take appropriate action in the coming months.

HMRC will also announce updated legislation in fixed protection 2016 (FP16) to extend the ability for taxpayers affected by the reduction to utilise FP16 and individual protection 2016 (IP16) to limit the impact of the latest cut in pension limit. The legislation for the protection regimes is expected to be similar to that announced in 2014, which was covered in our July 2014 article.

A claim under FP16 will allow a saver whose pension pot is currently between the £1m and £1.25m but has not yet exceeded the upper level to continue to benefit from the higher level but will result in them being able to make any further pension contributions into any scheme in the future. Any future contributions made after an FP16 claim will be liable to an income tax charge when the pension is eventually taken at a rate of 55 per cent.

IP16 will allow a pension saver to “lock in” the value of their pension pot at 5 April 2016 while allowing the potential for future contributions to continue to be made. Any applicant who wants to consider a claim under IP16 must have a ‘relevant amount’ in excess of £1m already and must not have opted for one of the predecessor reliefs of primary protection (between 2006 and 2009) or IP14.

It should be noted, however, that a claim under IP14 – for those pension savers who have a pension pot valued at between £1.25m and £1.5m at 5 April 2014 will still be eligible to make a claim under IP14 up to 5 April 2017.

As this is a complex area of calculation of the ‘relevant amount’ of pension accruals at possibly two separate dates – 5 April 2014 and/or 2016 – but which will impact on the tax position of a pensioner when the pension is eventually taken, it will be necessary to seek advice from a pension specialist, your client’s provider or an IFA to determine which claim – if any – will be most beneficial.