Keen to make sure you’re on top of the latest changes and making the most of your pension?
(Helen Tandy and Olivia Bowen)
From April 2016, the government is introducing two important changes to pensions. One change affects high earners, while the other affects people with significant pension pots.
In addition, it has been mooted in the press that higher rate tax relief on pension contributions may cease. This may be announced in the next Budget i.e. 16 March 2016, and may be introduced immediately.
It is therefore important that if you are considering making a personal lump sum pension contribution that you do so sooner rather than later.
The annual allowance will fall for high earners
From 6 April 2016, the amount of tax relief you can claim on your pension contributions could reduce significantly. This will generally apply to anyone earning over £150,000. It may also affect people who earn less, but whose employers make substantial contributions to their pension pots. In practice, this means the annual allowance of £40,000 may be reduced to as little as £10,000 for some high earners.
The annual allowance will fall by £1 for every £2 of income over £150,000. If you have adjusted income of £210,000 or more, your annual allowance will be £10,000.
That means until April 2016, it may be in your best interests to maximise your contributions before the new annual allowance kicks in.
The lifetime allowance (LTA) is also going down
You usually pay tax if your pension pots are worth more than the lifetime allowance. The lifetime allowance will go down from £1.25 million to £1 million from 6 April 2016. When you take your benefits, you’ll pay a tax charge on any money in your pension pot over this amount.
However, there are a number of transitional protections available to protect you:
1. Fixed protection 2016 (FP2016) allows clients to keep a £1.25M LTA beyond 2016. But, as before, there's a trade-off:
Defined Contribution (e.g. personal pension) contributions have to stop after 5 April 2016.
- Increases in Defined Benefit (e.g. Final Salary Schemes) rights will be limited in any tax year from 2016/17 onwards.
2. Individual protection 2016 (IP2016) is only available to clients with pension savings worth more than £1M on 5 April 2016, but less than £1.25M. Importantly, Individual Protection 2016 allows funding to continue. There's no downside to individual protection, so anyone eligible should do it. You'll secure an increased LTA with no trade-off. It can be used alongside any of the fixed protections to provide a safety net to fall back on if fixed protection is lost.
Anyone close to the LTA may want to consider some additional funding before the end of the tax year to push the fund value over the £1M limit to secure individual protection.
Individuals no longer need to apply for fixed or individual protection before April 2016.
HMRC say: From April 2016 there will be two protection regimes available IP2016 and FP2016. There will be no application deadline for these protections. However individuals will need to apply for protection before they take their benefits as they will need the HMRC reference number if they want to rely on the protection. This means that those wanting to rely on IP2016 or FP2016 should apply before they take any benefits on or after 6 April 2016. This is so that those benefits can be tested against the higher Lifetime Allowance (LTA) provided by these protections rather than the £1 million standard LTA. This applies even when the benefits being taken are worth less than £1 million.
We are introducing a new online self-service for pension scheme members to apply for protection and this service will be available for members to use from July 2016*. Members will no longer receive a lifetime allowance protection certificate, instead once they have successfully applied for protection the online service will provide them with a reference number which they will need to keep.”
*There is an interim process available for those affected, who wish to take benefits before July 2016.
Action: Check how much lifetime allowance you’ve used
If you’re in more than one pension scheme, you must add up what you’ve used in all pension schemes you belong to.
What counts towards your allowance depends on the type of pension you have:
Type of pension pot
What counts towards your lifetime allowance
Defined contribution - personal, stakeholder and most workplace schemes
The value of your pension pot, regardless of how you decide to take the money
Defined benefit - some workplace schemes
Usually 20 times the pension you get in the first year plus your lump sum - check with your pension provider
If you think your total pension benefits are close to £1million or above, ask your adviser, employer or pension provider how much of your lifetime allowance you’ve used.