Know your Limits

It was only relatively recently, in April 2006, that HM Treasury brought in legislation to simplify the many different pension regimes that existed at the time.

This was done partly to ensure that from the 6th April 2006, all pensions accrued their benefits within set limits, removing the bewildering array of different rules and caveats that existed before this date, on any new pension accrual after this date.

Pension Simplification
This was known as ‘Pension Simplification’ and with it came a limit on the maximum amount of pension benefits that one could accrue without incurring a tax charge, known as the lifetime allowance. This was originally £1.5m although this steadily rose in the years from 2006, so that in the tax year 2010/11, the lifetime allowance was £1.8m.

Stay with me here, because at the same time, the legislation made provision for people with pension pots approaching or exceeding the lifetime allowance, to protect their entitlement, provided they adhered to the conditions of their entitlement. These were called ‘Primary Protection’ and ‘Enhanced Protection’.

Much simpler already isn’t it!

Evolving Legislation
Since then HM Treasury have sought to limit further what can be paid into pensions each year, known as the annual allowance (see more below), as well as advising that from 6th April 2014, the lifetime allowance will fall from the now reduced £1.5m to £1.25m.

This may sound like a lot of money, but when you consider that in real terms the lifetime allowance has fallen and the method’s for calculating the lifetime allowance are not just a case of adding up the values of pensions, you can quickly get up to this number, particularly for people in final salary pension schemes.

For example, someone in a final salary pension scheme with an expected annual pension of £50,000, will have used £1m of the lifetime allowance. Add onto this any private pension provision and it is easy to see how the lifetime allowance could be exceeded.

A summary of the various protection provisions are shown below:

Watch that Tax Charge
Incidentally, exceeding the lifetime allowance will result in a tax charge of 55% on the excess, so this is something to be carefully monitored.

A New Hope
HM Treasury has advised that a new provision, called Fixed Protection 2014, can be applied for, before 6th April 2014.

This will effectively allow you to retain your lifetime allowance at £1.5m although you’ll need to give up any ongoing payments into money purchase pensions (typically investment linked plans) before the deadline and accrual of benefits within defined salary (final salary schemes for example) can only be made within certain rules.

For those that wish to continue to accrue benefits, Individual Protection 2014 can be used from 6th April 2014 and whilst we are awaiting the final details as to how this will work it is likely that:

• It will give you a lifetime allowance equal to the value of your pension rights on 5 April 2014 – up to an overall maximum of £1.5 million.
• You will not lose individual protection 2014 by making further savings in to your pension scheme
• Any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge

It will only be possible to apply for Individual Protection 2014 from the 6th April 2014, if the individual’s pension savings are valued in excess of £1.25m.

Annual Limits
If you’re someone who is serious about making a decent provision for retirement, it is likely that you’ll need to make substantial pension contributions and you should be mindful that the annual limit, known as the annual allowance, is also being reduced from £50,000 to £40,000.

Take Advice & Don’t Delay
Clearly this is a complex area and it is therefore appropriate to take the time to receive advice on how these provisions, both on their own or in combination, work and how they affect you.

Business owners and highly paid individuals are typically the types of people who may wish to take particular care with these rules, but clearly they can apply to anyone at any time without notice!

If you wish to discuss this further, please do contact us, as time is of the essence, if it becomes advisable to switch on protection for your pension pot prior to 6th April 2014.

Please be aware that it can take a considerable time (months) to obtain all the necessary information from pension providers in order to provide suitable advice.

One Final Thought
It is proposed that the necessary legislation will be contained in the Finance Bill 2014. The regulations covering the Individual Protection 2014 application process will therefore not be available until the bill receives Royal Assent, which is likely to be in July 2014. Whilst the legislation will have a retrospective effect from 6th April 2014, when an individual in theory can apply for Individual Protection 2014, there will not in fact be any legislation in place to allow them to do so!

If you would like to know more about how this affects your own personal circumstances, please do get in touch on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.