Technical Update: Lifetime Allowance and Protections Since 2012
Pension simplification – brought in from April 2006 – was supposed to introduce a simple single set of tax rules for pensions. But, in reality, the need for transitional protections to guard against the lifetime allowance charge just meant pensions remained as complicated as ever.
And the situation was to get worse. When the Coalition Government reduced the lifetime allowance in both 2012 and 2014 at least one new set of protections was brought in to help those with larger pension savings, and working towards the previously higher allowance, avoid or minimise any tax charge.
New protections for 2016
As well as the primary and enhanced protections, there are a further three sets of transitional protections – fixed protection 2012, fixed protection 2014 and individual protection 2014. And with the lifetime allowance about to reduce once more to £1 million from April 2016, we are due to get two new sets of protections. The good news, though, is HMRC is reviewing whether there should be any time deadlines for applying.
As advisers, you need to have a good understanding of how transitional protections work and how they can help your clients avoid paying unnecessary tax on their pensions savings.
Intelligent Pensions have put together a suite of technical support to help you navigate this complex area:
- Factsheet 3 explains how the newer protections introduced from 2012 work and introduces the new protections which will apply from April 2016. (Factsheets 1 and 2 explained the lifetime allowance and benefit crystallisation events, and the original primary and enhanced protections.);
- Register for our Webinar on 29 September at 11.00 to review our lifetime allowance guide, our series of lifetime allowance factsheets and to look at the financial planning issues and opportunities that exist.
Previous Support Materials:
- Our In-Depth Guide to the lifetime allowance gives you all the information you need to know - click here
- Factsheet 1 provides an overview of the Lifetime Allowance and Benefit Crystallisation events.
- Factsheet 2 explains the original 2006 lifetime allowance protections
Our 1st Webinar gave an introduction to the lifetime allowance, calculating the charge and looking at examples of benefit crystallisation events - click here to watch again.
Example – Fixed Protection 2014
Henry has a SIPP worth £1.4 million at 5 April 2014. He applies for fixed protection, and fixes his lifetime allowance at £1.5 million. He stops contributing to his SIPP.
When he crystallises his benefits in June 2015, his pension savings have grown through investment to £1.52 million. Although the standard lifetime allowance is now £1.25 million, Henry only has to pay a lifetime allowance charge on the excess above £1.5 million – in other words a 55% tax charge on £200,000 (£110,000).