This year the immediate planning issues for most professional pension advisers are likely to be focused on the reduction in the annual and lifetime allowance limits.
Two new LTA protection options will be available from April 2014
From 6 April 2014, the standard lifetime allowance limit (LTA) is being reduced to £1.25 million and the annual allowance for tax-relievable pension contributions is being reduced to £40,000.
Two new LTA protection options will be available from April 2014: Fixed protection 2014 (FP14) and individual protection (IP) – although consideration of application and planning for each clients can be done now. Both or either can be used, depending on client circumstances:
The new Individual Protection (IP) will be introduced as a transitional lifetime allowance (LTA) protection option to protect those with LTA values greater than £1.25m, but less than £1.5m as at 5 April 2014 and who could be affected (now or in the future) by this reduction in LTA.
Individual protection will be available if the value of total pension benefits on 5 April 2014 is more than £1.25M, but will be ‘capped’ at the current (2013/14) SLTA of £1.5M and provided they have not applied for transitional LTA Primary Protection (although they may have enhanced, FP12 or FP14 transitional protection in place – these will take precedence over IP).
This will be the members’ Individual (personal) lifetime allowance limit.
Any benefits crystallised above this allowance will be subject to the lifetime allowance charge in the normal way – and this is currently 55%.
A key consideration is that IP won’t be lost if further contributions are made, if benefit accrual occurs or a new scheme is started; with IP there is a lot of flexibility within the capped IP LTA amount.
But, the capped amount doesn’t leave a lot of scope in the longer term.
Draft clauses for the Finance Bill 2014 have been published.
All applications for IP must be received by 5 April 2017.
Fixed Protection 2014 is being introduced for those who have pension rights that already exceed (or are likely to exceed) the reduced lifetime allowance of £1.5m and where no enhanced, FP12 or primary protection exists.
Those who register for FP14 will have a protected personal lifetime allowance of £1.5M and be able to take pension benefits now (or in the future) to the value of £1.5m without incurring the LTA charge of 55%.
But, they can’t have benefit accrual, make personal contributions or join a new pension arrangement after 5 April 2014.
Why is this important now?
A £500,000 pension pot in 15 years @5% net increase will be worth £1.04m
This isn’t an issue right now or apparently in the future. This figure is well under £1.5 (FP) or even £1.25m (IP). But, there is a risk that this might not happen.
What options would you advise?
Protect a higher Lifetime Allowance?
Protect a £1.5M allowance and stop saving into pension by 6 April 2014 using FP(14)?
Remember, in this case IP isn’t available, because pension savings are worth less than £1.25M.
These questions will be taking up some of your time in Q1 2014.
Two new LTA protection options from April 2014: Fixed protection 2014 (FP14) and individual protection (IP):
Individual Protection (IP) available to those where total pension fund value is worth more than £1.25m on 5 April 2014, ‘capped’ at £1.5m and where future contributions to a pension scheme are allowed.
Fixed protection (FP14) has £1.5m LTA from April 2014 and is available to anyone who doesn’t have any other form of LTA protection, but no more contributions into pension scheme.
Which one is best for your client?