If your pension savings are worth – or are likely to be – more than £1 million you may need to protect your pension savings from the lifetime allowance tax charge.
What is the lifetime allowance?
The lifetime allowance is the amount of savings you can take from your pension schemes without facing a tax charge.
The lifetime allowance is currently £1.25 million but is reducing to £1 million from 6 April 2016.
From 6 April 2016 if you take more than £1 million from your combined pension savings, you may face a tax charge.
How much is the lifetime allowance tax charge?
The lifetime allowance tax charge is
- 55% of any amount you take from your pension savings as a lump sum that is over the lifetime allowance
- 25% of any amount you take from your pension savings as pension income that is over the lifetime allowance
Do you know the value of your combined pension funds?
The lifetime allowance applies to the value of your combined UK registered pension schemes and some overseas schemes. You will need this information from any other pension schemes of which you are a member to help you understand if you need to apply to protect your pension savings from the lifetime allowance tax charge.
Do I need to do anything now?
If you are agreeing salary and pension contribution levels with your employer for next year, increases in contributions to your pension schemes based on higher earnings may mean you exceed the lifetime allowance.
You may need to act to protect yourself from a tax charge even if you are not yet nearing retirement.
If you have existing protection but know that you may lose this you may also need to consider whether to apply for the new protections.
What do I need to do to protect my pension savings?
From April 2016 you will be able to apply to HMRC for one of two new protections when the lifetime allowance is reduced. These will be known as fixed protection 2016 and individual protection 2016.
You will be able to apply for these new protections by using a new on-line self-service system which will be available from July 2016. If you wish to take your benefits in the period leading up to the self-service system going live, HMRC has a temporary arrangement in place. Please contact us or your financial adviser if this is your intention.
Your pension savings may already be protected
The lifetime allowance was introduced in 2006 and was reduced in 2012 and again in 2014.
Each time the lifetime allowance reduced, people who had already planned their pension savings on the basis of the higher lifetime allowance could protect their pension savings by applying to HMRC and should have received a certificate to confirm their protection.
However you may still be subject to the lifetime allowance charge if you lose this protection.
You can still apply for protection from the 2014 reduction in lifetime allowance until 5 April 2017. You can find more information about how to do this along with other information about the existing protections and when these may be lost at https://www.gov.uk/tax-on-
If you have any questions, please do not hesitate to contact us.
