Protecting your pension fund
As the pension fund lifetime allowance (LTA) will be reduced yet again, down from £1.25m to £1m on 6 April 2016, there will be two new opportunities to protect the pension funds you have accrued to date from penal tax charges. The first, Fixed Protection 2016 (FP2016), will allow a personal LTA of £1.25m beyond 5 April 2016, but no contribution or benefit accrual is permitted beyond that date. The second, Individual Protection 2016 (IP2016), is relevant if your pension fund is valued at more than £1m and less than £1.25m at 5 April 2016. Under IP2016 you will be able to continue to contribute or accrue benefits after 6 April 2016 without a lifetime allowance charge when benefits are taken, provided your fund does not exceed £1.25m.
When to apply for protections?
There will be no application deadline for either of these protections, but you will need to apply for protection before you take your benefits. HMRC is launching an online application process which will be available in July 2016. It is not possible to apply for FP2016 or IP2016 before 6 April 2016, however, decisions have to be made before then as under FP2016, pension contributions cannot be made after 5 April 2016.
It is also still possible to apply for Individual Protection 2014 (IP2014) to protect pension funds built up before 6 April 2014 from the LTA charge. IP2014 is available to those with funds valued at over £1.25m on 5 April 2014, and you have until 5 April 2017 to apply. IP2014 will give applicants an individual LTA equivalent to their total funds on 5 April 2014, subject to a maximum of £1.5m. Importantly, pension funding or accrual can continue, although any excess in value above the 5 April 2014 maximum value (£1.5m) will be taxable at 55% when tested against the LTA.
Pension funding from 6 April 2016
The annual allowance for pension contributions will remain at £40,000, however, those with taxable income above £150,000 per tax year (including employer and employee pension contributions as well as investment income) will see their annual allowance decreased by £1 for every £2 of income above £150,000 with a maximum reduction of £30,000. This means the maximum annual allowance will be £10,000 for those whose income reaches £210,000 or more.
A reduced maximum annual allowance of £10,000 also applies if you have already flexibly accessed pension benefits via income drawdown.
It is still possible to carry forward unused pension contributions from the three previous tax years with an anomaly for tax year 2015/16. Following the Budget announcement on 8 July 2015, the tax year was split into two parts: 6 April 2015 to 8 July 2015 and 9 July 2015 to 5 April 2016, potentially allowing a pension contribution of up to £80,000, or two annual allowances for 2015/16 for those who contributed £40,000 in the period to 8 July 2015.
For 2016/17 those with contributions limited to £10,000 as their income is in excess of £210,000 will be able to pay additional contributions in respect of unused pension contribution allowances from the three previous tax years (the maximum unused contribution for 2015/16 is limited to £40,000).
- Do you know where you stand with regards to your pension fund and future pension contributions?
- If you are employed and affected by the new rules have you discussed this with your employer?
- Do you have a one-off opportunity to make a large contribution before 5 April 2016 to take advantage of the additional annual allowance for 2015/16?
For further information please contact David Currie (T: 028 9072 3081)
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Smith & Williamson Financial Services Limited
Authorised and regulated by the Financial Conduct Authority