Lifetime Allowance – the Government consults on individual protection

Introduction

With the LTA set to reduce to £1.25 million in 2014, the Government has published proposals for new protections aimed at giving individuals who have built up pension savings based on the current LTA “greater flexibility” in protecting them from an LTA charge.

In this Alert

• Key points
• Background
• Fixed protection 2014
• Individual protection 2014
• Interaction between tax protections
• Other proposals on IP14
• Next steps

Key points

• As originally announced in the 2012 Autumn Statement,1 the Government intends to introduce both an additional form of fixed protection (FP14) and a new “individual protection” (IP14).
• IP14 is designed to give individuals with pension savings in excess of £1.25 million on 5 April 2014 a personalised LTA based on the value of their pension savings at that date (subject to an overall maximum of £1.5 million).
• Applications for FP14 will need to be made to HMRC by 5 April 2014, but individuals are expected to have until 5 April 2017 to apply for IP14.

Background

The LTA is the total amount of tax relieved pension savings that an individual can build up over their lifetime without incurring an additional tax charge. For this purpose, DC benefits are assessed by reference to the value of the individual’s pot and, for DB savings, it is the capital value of the pension (using a factor of 20).

From the tax year 2014/15, the LTA will reduce to £1.25 million from its current level of £1.5 million.2 Members with either enhanced or primary protection will be unaffected by this change.

To help those most affected by the reduction in the LTA, transitional protections will be available in the form of FP14 and IP14. The current consultation sets out the ways in which the Government intends FP14 and IP14 to operate, as well as Government proposals for their interaction with existing protections.

Fixed protection 2014

Using the framework of the fixed protection regime introduced from April 2012, when the LTA was reduced to £1.5 million (from £1.8 million),3 FP14 will allow an individual to maintain an LTA of the greater of £1.5 million and the standard LTA.4 As with FP12, FP14 will be lost:

• in a DC arrangement, if contributions are paid to the scheme by the member or someone else on their behalf, or employer contributions are paid;
• in a DB arrangement, if the pension and lump sum rights of a member increase by more than the relevant percentage5 at any time during a tax year. The test for benefit accrual can occur at any time up to the point when benefits are actually taken;
• if a new arrangement is established in respect of the individual; and
• on a transfer, subject to certain limited exceptions.

Individuals will be able to apply for FP14 after the new legislation comes into force (expected to be in summer 2013). A signed application form will need to be received by HMRC by 5 April 2014.

Individual protection 2014

The Government also plans to introduce a new protection that will entitle individuals to an LTA of the greater of the value of their pension rights as at 5 April 2014 (up to an overall maximum of £1.5 million) or the standard LTA. For example, an individual with pension savings of £1.3 million on 5 April 2014 who applies for IP14 will have a personalised LTA of £1.3 million. But if an individual’s pension savings exceed £1.5 million on 5 April 2014, their personalised LTA will be limited to £1.5 million.

A successful applicant for IP14 will get a personalised LTA expressed as a monetary amount. This personalised LTA will not increase unless the standard LTA increases to a level which exceeds it, at which point the individual would revert to the standard LTA.

In contrast to the rules for FP14, individuals with IP14 will not be subject to any restrictions on accruing further benefits or paying future contributions. However, HMRC’s current proposals indicate that any increase (including those required by legislation) above the personalised LTA on or after 6 April 2014 will be subject to an LTA charge, unless the standard LTA increases. This will potentially capture both DB revaluation and DC contributions and investment growth.

Interaction between tax protections

Individuals will be able to hold both IP14 and either FP12 or FP14. Where an individual registers for both types of protection, fixed protection will take precedence, with the individual able to rely on the higher LTA. But if either FP12 or FP14 are lost, IP14 will then come into play, taking effect from the date on which fixed protection is lost.

However, individuals with primary and/or enhanced protection are likely to be excluded from applying for IP14. As IP14 would provide a lower personalised LTA than individuals with primary protection currently enjoy, it is not expected to be of any benefit.

As regards those with enhanced protection, the consultation points out that they “have benefited from generous protection from the LTA charge since 2006 and in many cases have had significant scope to continue to benefit from UK tax relief on their pension savings since then”. As such, the Government does not think it would be fair to allow such individuals to “move between different forms of protection on the grounds that one form of protection could be more advantageous than the other at some point in time”.

Other proposals on IP14

As part of its consultation, the Government is also considering:

• Lump sums – it is proposed that an individual with IP14 would be entitled to take up to 25% of their pension fund as a tax free lump sum, subject to an overall maximum of 25% of their personalised LTA.
• Scheme pays6 – in the interests of fairness, the Government is considering whether a deduction should be made to the level of an individual’s personalised LTA where their pension rights are reduced as a result of scheme pays.

Next steps

While FP14 will be dealt with in the current Finance Bill and regulations to be made under it that will come into force later this year, the detail of IP14 is expected to be included in the Finance Bill 2014.

The consultation (to which Sackers will be responding) closes on 2 September 2013.