RegulationFeb 19 2016

LTA – transitional protection and other factors

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LTA – transitional protection and other factors
ByDanny Cox

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lifetime allowance are subject to 25 per cent additional tax on money left in a pension and 55 per cent on lump sums withdrawn from a pension.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.