The Lifetime Allowance & Fixed Protection
The start of a new tax year today sees the Annual Allowance for tax privileged pension savings reduced from £255,000 to £50,000 a year.
This is an important change for higher earners, as they will need to understand the new limits to ensure they do not become liable for any unnecessary tax charges when making contributions or accruing benefits.
Another important change to the pension tax system is being introduced a year today, on 6th April 2012, and planning for this change should be taking place now.
On 6th April 2012, the Lifetime Allowance for pension funds and benefits is being reduced to £1.5m from the current level of £1.8m.
This means that the Lifetime Allowance is being reduced back down to the level at which it was originally introduced back in 2006.
£1.5m sounds like a lot of money. In fact, it is a lot of money – unless you happen to have pension funds worth this much or more, or you have final salary pension benefits which, when multiplied by a valuation factor of 20, takes you over this new limit.
Members of defined benefit schemes who have built up pension benefits of £75,000 per annum or more might need to consider something called Fixed Protection.
Protection against a Lifetime Allowance charge once this limit is reduced at the start of the next tax year is available in the form of Fixed Protection.
Fixed Protection freezes the Lifetime Allowance at £1.8m, assuming you meet certain conditions in terms of future pension contributions or accruals.
If you apply for Fixed Protection, you will lose this if you start a new pension arrangement (other than to accept a transfer) or accrue further pension benefits.
We are still waiting for the Fixed Protection rules to be finalised and the information here is based on draft guidance from the HMRC, which could be subject to change.
As we wait for the rules to be finalised and for the Fixed Protection forms to be made available from HMRC, we urge anyone with large pension benefits to get in touch to start the process of reviewing their options to ensure they avoid future unnecessary tax charges.
Photo credit: Flickr/alancleaver_2000