When someone retires, the amount crystallised on a ‘benefit crystallisation event’ will show if they are breaking through the lifetime allowance of £1m, but some can avoid that by protecting a higher amount.
At different times from A-Day (April 6 2006), new forms of protection have been enshrined in law; particularly when the standard lifetime allowance has been reduced.
The latest cut, to £1m from £1.25m, applies from April 6 2016. So who can avoid this and protect a higher amount?
Individual protection 2016 from the lifetime allowance will appeal particularly to pension scheme members who expect to continue to benefit from significant employer contributions
Registering for ‘fixed protection 2016’ preserves entitlement to a lifetime allowance of £1.25m.
Provided they do not have primary, enhanced or an earlier form of fixed protection, anybody can choose this – including, for example, someone whose current pension benefits are worth much less than £1.25m but who expects investment growth to take the value over £1m.
The catch is that from April 6 2016 they must not accrue any more benefits in any registered pension scheme, which means opting out of active membership and not paying a contribution or joining any scheme in future. If any of those things happen, fixed protection is lost.
Individual protection
Canny savers can cover that risk too, up to a point, by also registering for ‘individual protection 2016’.
This does not require cessation of future accrual, but it does require the member to obtain a valuation of all their pension rights – including pre-A Day rights and crystallised rights – taken as a snapshot on April 5 2016.
If the total exceeds £1m, and they do not hold primary protection, individual protection 2016 gives them a lifetime allowance of the greater of that total value (max £1.25m) and the standard lifetime allowance.
Individual protection 2016 will appeal particularly to pension scheme members who expect to continue to benefit from significant employer contributions.
They risk having to pay a lifetime allowance charge eventually, but it will be less than if they had no protection, and might be seen as worth paying if the employer contributions are more valuable. Individual protection 2016 can only be lost in certain circumstances involving a pension debit arising from divorce.
Under existing regulations, employers can choose not to automatically enrol, or re-enrol, a jobholder to whom a form of protection applies.
This option is expected to be extended to cover FP 2016 (and IP 2016). It would eliminate the need for the jobholder to opt out to avoid losing FP 2016, and the risk to employee relations from a failure to successfully opt out.
To obtain FP 2016 or IP 2016, the member will be required to register using an online process, which will not be available until after the finance bill – which includes the governing legislation – obtains royal assent some time in July.
HM Revenue & Customs has created a way for members wishing to take benefits between April and July – while relying on the new protections – to obtain a temporary reference number.
Annual allowance
At the same time as this latest cut to the lifetime allowance was announced in last July’s emergency Budget, complicated changes to the annual allowance were foreshadowed too, affecting individuals with ‘adjusted income’ of more than £150,000.
For every £2 of adjusted income over £150,000 their annual allowance will be reduced by £1, from £40,000 down to a minimum of £10,000.
However, an individual whose ‘threshold income’ – another new term – is no more than £110,000 will not be subject to this ‘tapered’ annual allowance.
Simplifying the definition considerably, ‘adjusted income’ equals all the individual’s taxable income, plus pension contributions, plus the value of any employer pension contributions.
This creates a headache, and not only for the member, who is obliged to account for any tax owed if their annual allowance is exceeded.
The pension scheme administrator must send an annual pension savings statement to any member whose pension savings have exceeded the annual allowance, but they cannot know whose adjusted income might have triggered the taper. That is a problem HMRC has still to solve.
Ian Neale is director at intelligence provider Aries Insight
