Key facts about pension lifetime allowance changes
Susan Cattell and Christine Scott of ICAS look at another important pension change on the horizon and highlight HMRC’s guidance for pension scheme members.
Since 2006, pension scheme members have had a tax rollercoaster ride. The major changes brought in on ‘A’ Day 2006 were supposed to establish a new and lasting tax framework for pension saving. However in the last few years there have been numerous changes to both the lifetime allowance and the annual allowance.
The lifetime allowance has already been reduced in 2012 and 2014. From April 2016 it will reduce again to £1m. In the 2015 Budget, the Chancellor announced that from 2018 the allowance would be indexed, using the Consumer Price Index, so it may start to increase again.
It is important that all pension scheme members monitor their pension savings and consider how the imminent reduction in the lifetime allowance may affect them.
HMRC has issued some guidance which is set out below.
What is the lifetime allowance?
The lifetime allowance is the amount of savings you can take from your pension schemes without facing a tax charge.
The lifetime allowance applies to the value of your combined UK registered pension schemes and some overseas schemes
The lifetime allowance is currently £1.25m but is reducing to £1m from 6 April, 2016.
From 6 April 2016, if you take more than £1m from your combined pension savings, you may face a tax charge.
How much is the lifetime allowance tax charge?
The lifetime allowance tax charge is:
- 55% of any amount you take from your pension savings as a lump sum that is over the lifetime allowance, and
- 25% of any amount you take from your pension savings as pension income that is over the lifetime allowance.
Do you know the value of your combined pension funds?
The lifetime allowance applies to the value of your combined UK registered pension schemes and some overseas schemes, including both defined benefit schemes and defined contribution schemes.
Your pension scheme(s) may already send you information that will help you to find out the value of your combined pension savings. If not you should contact your pension scheme(s) for more information.
This information will help you if you need to apply to protect your pension savings from the lifetime allowance tax charge.
Do I need to do anything?
If you are agreeing salary and pension contribution levels with your employer for next year, increases in contributions to your pension schemes based on higher earnings may mean you exceed the lifetime allowance.
You may need to act to protect yourself from a tax charge even if you are not yet nearing retirement.
If you have existing protection but know that you may lose this you may also need to consider whether to apply for the new protections.
What do I need to do to protect my pension savings?
From April 2016 you will be able to apply to HMRC for one of two new protections when the lifetime allowance is reduced. These will be known as fixed protection 2016 and individual protection 2016.
The new self-service system is still being developed and HMRC will be providing more information on this in due course
You will be able to apply for these new protections by using a new online self-service system which will be available from July 2016. The new self-service system is still being developed and HMRC will be providing more information on this in due course.
You can find more information about the reduction of the lifetime allowance in HMRC’s Pension Schemes Newsletters 72 and 73.
Your pension savings may already be protected
The lifetime allowance was introduced in 2006 and was reduced in 2012 and again in 2014.
Each time the lifetime allowance reduced, people who had already planned their pension savings on the basis of the higher lifetime allowance could protect their pension savings by applying to HMRC and should have received a certificate to confirm their protection.
However, you may still be subject to the lifetime allowance charge if you lose this protection.
You can still apply for protection from the 2014 reduction in lifetime allowance until 5 April, 2017. You can find more information about how to do this along with other information about the existing protections and when these may be lost at Tax on your private pension contributions - GOV.UK .
Will there be more changes in future?
Now that major reforms to the pensions system have been implemented, ICAS has suggested that it would be appropriate for the UK Government to consider setting up an independent pensions/ retirement savings commission as a standing advisory body which seeks to achieve long-term stability for the UK pensions system and cross-party consensus.
However, we know that the UK Government is considering radical changes to the model for pensions tax relief with an announcement possible in the March 2016 Budget. Find out more about the ICAS position on this.
Anyone with pension savings needs to make sure that they keep up to date with all the changes as they are announced.