The lifetime allowance is a restriction on the total amount of pension benefits that can crystallise over a lifetime without incurring a tax charge. It can also restrict the available tax-free cash for those who are affected due to the 25 per cent of the available lifetime allowance limit.
The lifetime allowance was £1.8m in 2011/12, but reduced to £1.5m on 6 April 2012 and to £1.25m on 6 April 2014. It will reduce to £1m on 6 April 2016 and then, from 6 April 2018, will increase in line with the annual percentage increase to the consumer price index (CPI) in the previous September, assuming CPI has increased. If the resulting lifetime allowance is not a multiple of £100 it will be rounded up to the next £100.
Benefits crystallised in excess of the lifetime allowance are subject to 25 per cent additional tax on money left in a pension and 55 per cent on lump sums withdrawn from a pension.
Transitional protection – fixed protection 2016
This will be available to anyone with a UK registered pension scheme or a relieved non-UK pension who does not currently hold enhanced, primary or fixed protection 2012/2014.
Regardless of when fixed protection 2016 is obtained, it is effective from 6 April 2016. This means scheme administrators may have to recalculate benefits taken between 6 April 2016 and the date on which fixed protection 2016 is subsequently obtained.
Those with fixed protection 2016 are treated for all purposes as if their lifetime allowance is £1.25m if this is higher than the standard lifetime allowance. This can reduce the amount of any scheme-specific tax-free cash, compared to not holding fixed protection 2016.
Broadly, fixed protection 2016 can be lost if further benefits accrue under a pension scheme, certain pension transfers take place or a new pension arrangement is set up after 5 April 2016. This means anyone considering applying for it should ensure they do not contribute to – or accrue additional benefits in – a pension scheme from 5 April 2016.
Any pension term assurance or group life assurance written under pension rules should also be taken into account.
Group life assurance or pension term assurance
Continuing with an existing defined benefit (DB) or cash balance life insurance policy does not lose fixed protection 2016.
Where the death benefit is DB or cash balance, then fixed protection 2016 is lost if there is an increase in the value of the individual’s rights under the arrangement at any time on or after 6 April 2016. Whether there is an increase in the value of the individual’s rights under the arrangement is based on the valuation assumptions as specified in section 277 of the Finance Act 2004, which take no account of death benefits (and explicitly exclude rights ‘which have been occasioned by physical or mental impairment’).
Where the death benefit is money purchase then Fixed Protection 2016 is lost if a relevant contribution is paid. This does not include contributions for life insurance set up before
6 April 2006, provided the only benefit payable is a death benefit and neither the term nor amount assured are varied significantly.
Joining a new group life assurance policy written under pension rules on or after 6 April 2016 would mean losing fixed protection 2016. This is most likely to happen if an individual joins a new employer and is automatically joined to the employer’s group life assurance plan or is automatically joined after a promotion. Where the employer changes the company providing the life cover within the existing pension wrapper, this would not mean losing fixed protection 2016 as the pension scheme is not changing.
Transitional protection – individual protection 2016
This is available for those with pensions worth at least £1 on 5 April 2016 who do not hold primary protection. There is no deadline for applying for individual protection 2016.
Regardless of when individual protection 2016 is obtained, it is effective from 6 April 2016. Again this means scheme administrators may have to recalculate benefits taken between 6 April 2016 and the date on which individual protection 2016 is subsequently obtained.
Those with individual protection 2016 will have a personal lifetime allowance based on the value of their pensions as at 5 April 2016, capped at £1.25m. The total pension values on 5 April 2016 will be calculated as shown in Box 1.
Those who have had a benefit crystallisation event (BCE) while holding fixed protection 2012 will have a BCE certificate based on a percentage of the £1.8m fixed protection lifetime allowance, those who had a BCE while holding fixed protection 2014 will have a BCE certificate based on a percentage of £1.5m, and those who have had a BCE while holding individual protection 2014 will have a BCE certificate based on a percentage of their personal lifetime allowance.
It is possible to hold individual protection 2016 as well as enhanced protection, fixed protection 2012/2014/2016, and individual protection 2014. In these circumstances the higher relevant level of protection will take precedence and individual protection 2016 will be dormant.
Danny Cox is a chartered financial planner at Hargreaves Lansdown
