With almost two months left, there is still plenty of time for the usual tax year end optimisation tasks (we will provide detailed guidelines at the beginning of March). However, this year’s 5 April also marks the deadline for Lifetime Allowance Individual Protection 2014 application, which may require longer time to prepare. If you are still unsure whether you should take advantage of it, now is the time to review your pension and make the decision. Below we will summarise the most important facts and rules.
Lifetime Allowance and Its Reductions
The Lifetime Allowance (LTA) caps the total amount you can draw from your pension throughout your life before triggering the so called LTA charge – a rather high special tax, currently at 25% for benefits taken as income and 55% for a lump sum.
In the recent years, as part of the overall effort to make public finances more sustainable, the Government reduced the LTA on three occasions:
- In 2012 from £1.8 million to £1.5 million
- In 2014 to £1.25 million
- In 2016 to £1 million
Those who have built up pension pots large enough to exceed the new lowered LTA have the option to apply for LTA protection, as a compensation for the unfavourable rule changes. There have been different versions of LTA protection, always specific to the particular LTA reduction (year) and subject to different conditions (e.g. whether you can continue contributing to your pension plan).
The one whose deadline is approaching now is Individual Protection 2014 (IP 2014), designed for those affected by the 2014 LTA decrease from £1.5m to £1.25m who have continued to contribute to their pension plans after 5 April 2014 or intend to make further contributions in the future.
What Individual Protection 2014 Does
IP 2014 sets your personalised LTA to the lower of:
- The value of your pension at 5 April 2014
- £1.5 million
For example, let’s say your pension was worth £1.4 million at 5 April 2014 – within the old LTA effective before the 2014 reduction (£1.5m), but above the new one (£1.25m). As a result, part of your pension would become liable for the LTA charge upon withdrawal. If you apply for IP 2014, you can have LTA set individually to £1.4 million, possibly saving 25% (income) or 55% (lump sum) of £150,000 in LTA charges.
Applying for IP 2014
IP 2014 is not granted automatically and you must make a formal application by 5 April 2017. After that date the opportunity is lost forever.
In order to do so, you first need to know the value of your pension (or the combined value of all your plans if you have more than one) at 5 April 2014. Depending on pension provider, this may take considerable time to find out, which is why we recommend to start immediately.
In general, an application makes sense for those with pensions worth above £1.25m at 5 April 2014. You can apply even if your pension was worth more than £1.5m (above the old LTA) – in such case your personal LTA would be protected at £1.5m.
If You Already Have LTA Protection
Note that you can have multiple versions of LTA protection at the same time. In other words, you can also apply for IP 2014 even if you already have some of the other kinds of LTA protection in place, such as a fixed protection (any of the years) or enhanced protection (but those with primary protection are ineligible).
Applying for IP 2014 can make sense even when you already have a more favourable LTA protection in place. Different versions are subject to different conditions, and some actions (such as making further contributions to your scheme) may invalidate certain kinds of LTA protection going forward – then you will be able to use the next best version you have.
More Information and Assistance
You can find more detailed official information on the HMRC website. We would be happy to provide more detailed explanation, or assist with obtaining pension scheme details and making the application. You can contact us here