Pensions update - LTA - February 2014

PENSIONS – ACT BEFORE 6 APRIL 2014 TO
PROTECT YOUR LIFETIME ALLOWANCE
The latest in a series of changes to the pension rules reduces the lifetime
allowance but gives individuals two options to protect their entitlement.
Background
The lifetime allowance (LTA), the maximum an
individual can hold in a pension fund without facing
penal tax charges when taking pension benefits, was
introduced in April 2006. Individuals with large
pension pots were allowed to protect themselves
from an excess charge on their pension funds by
applying for ‘primary’ or ‘enhanced’ protection
(depending on their circumstances and the values
of their funds).
By April 2012, the LTA had reached £1.8m and the
Government decided to reduce it to £1.5m. At that
stage individuals could opt for ‘fixed protection
2012’ (FP12) to retain the £1.8m LTA, but no further
personal contributions could be made after 6 April
2012 (and benefits accrued under an employer’s
defined benefit scheme could not exceed a
specified percentage) without losing protection.
Current changes
Finance Act 2013 introduced a reduction in the LTA
from £1.5m to £1.25m from April 2014 and as the
maximum tax free cash entitlement remains 25% of
the fund, the maximum cash amount will fall to
£312,500. The act also introduced a new ‘fixed
protection 2014’ (FP14) whereby individuals can
elect (before 6 April 2014) to preserve the £1.5m
limit but, as before, if they make pension
contributions after 6 April 2014 they will lose this
protection. However, it is not possible to use FP14
if you already have primary, enhanced or FP12
protection.
Draft Finance Bill 2014 introduces another option:
from 6 April 2014 until 5 April 2017, individuals will
be able to opt for ‘individual protection 2014’
(IP14). Opting for IP14 will preserve an individual’s
LTA at the lower of £1.5m or the actual value of
their pension fund at 5 April 2014 (subject to a
minimum of the standard LTA, ie £1.25m in
2014/15).
Under the IP14 rules, individuals can continue to
make (or receive via their employers) further
contributions to their pension funds after 6 April
2014 without losing the protection of their
individual LTA. A charge under the LTA rules will
continue to arise on those post 6 April 2014
contributions resulting in the individual’s IP14 LTA
being exceeded, at the time the pension vests and
this charge will remain at 55% of the excess over
the individual’s personal LTA for a lump sum
entitlement and 25% for a pension entitlement.
Where this charge is paid from the funds in the
pension scheme (ie a ‘scheme pays’ election is
made), the amount paid will not erode the IP14
LTA.
Individuals who have the original primary protection
can not elect for IP14, but individuals who have
enhanced protection, FP12 or FP14 can also elect
for IP14 as a fall back position. It may not be as
beneficial as the earlier forms of protection could
potentially be, but if they are lost, individual
protection would take effect and would at least fix
your LTA at the higher of the value of your fund at
5 April 2014 or £1.25m.
Annual allowance change
The annual contribution limit for an individual (the
total of personal contributions and those made by
an employer) is £50,000, within pension input
periods (PIPs) ending before 6 April 2014. For later
periods the limit is reduced to £40,000.
Contributions made by individuals, and the grossed
up benefit accrual for a defined benefit scheme,
that total more than the applicable limit (plus any
unused relief brought forward) trigger a tax charge.
Unused allowances for PIPs ending in 2010/11,
2011/12 and 2012/13 are available for carry forward
into 2013/14. However, you must have been a
member of a registered pension scheme in the tax
year giving rise to the unused relief and any
contributions made in the year reduce the amount
available to bring forward.
How this affects you
Individuals with a pension fund that already exceeds
£1.25m (or is expected to by the time they wish to start
drawing pension benefits) should seek expert advice on
their options. Whether you should opt for FP14, IP14 or
both will depend on your circumstances, retirement
intentions and fund growth expectations.
Example 1
A Director in his late 50s is a member of a defined
benefit scheme and has a pension fund valued at £1.4m
LIFETIME
ALLOWANCE
PROTECTION
at
6 April 2014.
He should
opt for IP14:REGIMES
this will ensure
that
the
£1.4m
is
protected
and
that
further
Type
Covers
Restrictionspension
benefits funded by his employer can be accrued (albeit
subject to a penalty charges when drawn).
Example 2
A woman in her mid-60s is due to retire and will have
pension income of £25,000 from the state pension and a
final salary scheme. The final salary scheme is valued at
£350,000 and she has a self-invested personal pension
fund of £700,000. She could opt for flexible drawdown
on the personal pension but has no pressing need for the
funds. She will make no further contributions to the SIPP
but is pursuing an aggressive growth strategy with its
investments. While her current funds are valued at less
dates
than £1.25m it would be sensible for herDetails
to opt and
for FP14.
LTA prior to 6 April 2006 = unlimited
Primary
protection
Uprates your LTA
by a multiple
based on the
value of your
fund at
5 April 2006
 fund had to be worth more than £1.5m at 6 April 2006
 is lost if fund reduced below £1.5m by a pensions sharing order
on divorce
 can be held with enhanced protection but is dormant until
enhanced protection is lost or given up voluntarily
Had to apply by 5
April 2009
Enhanced
protection
Allows unlimited
LTA to continue
after 6 April 2006
 is lost if contributions made after 6 April 2006 or if the further
benefit accrual limits are exceeded
 can be held with primary protection as a back-up
 can also preserve the tax free cash entitlement at 5 April 2006
level
No qualifying
threshold for fund
size at 6 April
2006, had to
apply by 5 April
2009
LTA from 6 April 2006 = £1,500,000 increasing to £1,800,000 by April 2010
Fixed
protection
2012
Fixed your LTA at
£1.8m
 was not available if you had primary or enhanced protection
 is lost if contributions made after 6 April 2012 or if the further
benefit accrual limits are exceeded
Had to apply by 5
April 2012
LTA from 6 April 2012 = £1,500,000
Fixed
protection
2014
Fixes your LTA at
£1.5m
 is not available if you have primary, enhanced or FP12
 is lost if contributions made after 6 April 2012 or if the further
benefit accrual limits are exceeded
No qualifying
threshold for fund
size at April 2006.
Must apply by 5
April 2014
Individual
protection
2014
Fixes your LTA at
the lower of
£1.5m or value of
fund at 5 April
2014
 benefits must have value of at least £1.25m at 5 April 2014
 is lost if fund reduced below £1.25m by a pensions sharing
order on divorce
 can hold with FP12 or FP14 or enhanced protection
 cannot be held with primary protection (or where both
enhanced and dormant primary protection are held)
 is not lost if addition contributions made but LTA tax charge
(25%/55%) would apply to any excess when benefits taken
Must apply
between 6 April
2014 and 5 April
2017
LTA from 6 April 2014 = £1,250,000
If you would like expert advice on your pension options please get
in touch with your usual BDO contact who can arrange this for you.
This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining specific professional advice. Please contact
BDO Limited to discuss these matters in the context of your particular circumstances. BDO accepts no responsibility for any loss incurred as a result of acting on information in this publication.
BDO Limited is a limited liability company incorporated in Guernsey and a Member Firm of BDO International. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO
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Copyright © February 2014 BDO LLP. All rights reserved.
Website: www.bdo.gg
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