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Pension Lifetime Allowance Limit (LTA)

14th February 2014

Pension Lifetime Allowance Limit (LTA)

In 2006 the Government introduced a cap on the value of Pension Pots.  Individuals had an opportunity of applying for protection if their Pension Pot was in excess of £1.8 million or likely to exceed that.  Protection had to be applied for by 6 April 2006.

Following the introduction of this legislation, the Government have made further cuts to the Lifetime Allowance and in 2012 it was reduced to £1.5 million.  A further announcement has recently been made indicating that with effect from 6 April 2014 the Lifetime Allowance will again reduce from £1.5 million to £1.25 million.

We believe that this latest reduction is likely to have an impact on a wider number of people and therefore we wanted to make you aware in good time so that action can be taken if this is likely to affect you.

This applies to any individual who has any pension benefits that are not yet in payment (known as uncrystallised benefits) and are tested against the lifetime allowance limit in the tax year that they are paid.

In order to see whether or not it is appropriate for you to apply for protection, you need to look at your Pension values and whether there is any likelihood that might increase above £1.25 million. 

For benefits in payment that were set up prior to April 2006, the value of the Pension is calculated by multiplying the current income level by 25.  For pension benefits taken out since 6 April 2006 the income is multiplied by 20 plus any tax free cash taken.  For those that have indexed pensions the impact of indexation also needs to be taken into account. 

Example

Mr Potter is in receipt of benefits from his final salary pension scheme of £28,000 pa, indexed at 5% pa.  The benefits started prior to 2005.  He is also receiving income from an annuity arrangement of £12,000 pa (level) set up in 2008.   At the time he took tax free cash of £60,000.  He has a personal pension plan valued at £180,000 but has not yet taken any benefits from this.

As it stands today, the capitalised value of his pensions are:

Final Salary pension    £28,000 x 25 =                                 £700,000

Annuity                            £12,000 x 20 =                                £240,000        

Tax Free Cash                                                                             £60,000

Personal Pension                                                                      £180,000

Total Value                                                                               £1,180,000

Mr Potter’s pensions are currently valued at less than the new LTA of £1.25m effective from 6 April 2014. However, with the indexation on his Final Salary pension and some growth on his Personal Pension it is not inconceivable that he will exceed the £1.25m sometime in the future. 

Please note that all pensions are taken into account for this calculation except State Pensions and Contracted Out Rebate Only Pensions.

There are two types of protection that you can apply for.  Fixed Protection 2014 allows someone who believes their benefits will be in excess of £1.25 million by 5 April 2014 to apply.   This will need to be done prior to 6 April 2014 and they will no longer be able to make any further pension contributions otherwise the protection will be lost.

Individual Protection can also be applied for by those with pension pots valued over £1.25 million as of 5 April 2014.  This will enable those people to protect the value of the plan as at 5 April 2014 but also enable them to make further contributions.  We believe this form of protection may be of limited benefit as it caps the value of the pensions at the value as of 5 April 2014.  However, it may be relevant for certain people, such as those who are in occupational pension scheme and who may wish to continue to receive employer contributions, albeit that in future years there may be additional tax for exceeding the LTA limit. 

What is the Taxation on benefits in excess of the LTA

For lump sum benefits (i.e tax free cash) in excess of the LTA a tax charge of 55% is applied. On income an additional tax charge is applied of 25% (in addition to the marginal rate of tax you pay on your income). 

Auto Enrolment & Lifetime Allowance Limit

If you have applied for any form of Lifetime Allowance Protection beware of Auto Enrolment. If you are employed, your employer will at some stage be required to set up a Pension arrangement whereby you will become automatically enrolled.  You are able to opt out of this arrangement and therefore it is important that you do this within the appropriate time scales.  Failure to do so may mean that pension contributions are paid on your behalf and it will invalidate your Lifetime Allowance Protection.  

You also need to make sure that any pension contributions you make, when added to those made by your employer through Auto Enrolment, or any other arrangement,  do not exceed the annual allowance limit.

We would stress the importance of contacting us in good time if you feel you will be affected by the new limits coming into force so that we can calculate the value of your plans and apply for the appropriate form of protection

Please note that whilst we may look after some of your pension plans we may not be aware of all your plans and those that are in payment. Therefore, we cannot be responsible for information which we have not been made aware and you subsequently find that impacts on the new LTA regime.

If we can be of assistance in reviewing the need to apply for protection then we would ask you to contact us as soon as possible.

The levels, bases and reliefs from taxation are subject to the individual circumstances of the investor and maybe subject to future change.

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