Tony Granger highlights pension protection possibilities before 5th April 2014.
Lifetime allowance and over-funding of pension schemes.
From 6 April 2014 the lifetime allowance for pension funds falls from £1.5 million to £1.25 million. The effect of this is that well-funded pension funds that are growing through prudent investment and additional annual contributions may breach the funding limits for the lifetime allowance. This could then be subject to penal charges of 55% on lump sums and 25% on pensions (as well as income tax on taking the benefit) when benefits are taken. The lifetime allowance was as high as £1.8 million in 2011/12, but now falls to £1.25 million in 2014/15.
You could apply for protection.
You had the option to apply for primary or enhanced protection in the past to secure a higher lifetime allowance and protect funds over the allowance threshold. Protection is the ability to protect the growth and value of your pension funds to the current lifetime limit of £1.5 million.
There are currently two new types of pension fund protection – ‘IP 14’ which is individual protection, and ‘FP 14’ which is fixed protection. An individual could elect both protections.
Individual protection 2014.
- This will give individuals a personalised lifetime allowance based on the value of their pension savings on 5 April 2014 up to a maximum of £1.5 million.
- Individuals will need to have pension savings of at least £1.25 million on 5 April 2014 to apply.
- Protection will not be lost if further contributions to pensions are made.
- Individuals will have three years to apply for individual protection 2014 from 6 April 2014.
- Individuals will not be eligible to apply for this protection if they have ‘primary’ or ‘enhanced’ protection already.
Comment.
Unless you have pension funds of more than £1.25 million in value at this time, then the ‘IP14’ route is not for you.
Fixed protection 2014.
Fixed protection 2014 will allow individuals to fix their lifetime allowance at £1.5 million. In other words, you may have savings worth more than £1.25 million by the time you take your pension benefits. If you have ‘FP 14’ you would be entitled to a lifetime allowance which is the greater of £1.5 million and the standard lifetime allowance at the time. The main details of this form of protection are as follows:
- The protection may be lost if individuals build up additional pension savings after 5 April 2014, such as by accruing benefits in a defined benefits scheme, or making contributions to other pension schemes.
- Fixed protection may also be lost if an individual starts contributing to new pension arrangements.
- Individuals need to apply for this protection before 6 April 2014.
- The application form is now available on the HMRC website (www.hmrc.gov.uk).
- Individuals will not be eligible to apply for this protection if they have ’primary’ or ‘enhanced’ protection or ‘fixed protection 12’.
Practical Tip:
Whilst pension protections are available, if you apply for ‘FP 14’ you will not be able to make contributions in the future to any pension schemes. If this is an issue then it may be better to elect for no protection at all at this time, although this should be discussed with your pension adviser. They may have strategies on how you can crystallise your pension benefits in the future, and these combined with the tax relieved benefits from company contributions, could still be worthwhile, even if there are ‘penalty’ charges arising in the future. Taking a scheme pension uses up less lifetime allowance and may be preferable to a drawdown pension, which is another strategy. There are also other strategies you can employ, such as pensions for spouses, or to build up alternative pension funds that are not in your name. Professional advice on your specific circumstances is important.
