Once in a lifetime
Careful analysis is needed on protecting a lifetime allowance
The reduction in the pension lifetime allowance is fast approaching and we expect activity to increase for clients who are keen to secure protection where appropriate.
Those who are successful in applying will retain a link to a lifetime allowance of £1.8m until such time as the standard lifetime allowance (£1.5m from April 6, 2012) overtakes it, if it ever does.
But protection comes with a price and there is a need to be clear on the conditions that need to be met for it to be maintained.
Generally speaking, no contributions may be paid by the individual, their employer or anyone else on their behalf, into a money-purchase arrangement on or after April 6, 2012
The amount of benefits that can accrue under a final-salary pension arrangement on or after April 6, 2012 will be limited to not exceeding the “relevant percentage”, in general terms no more than the increase in the consumer price index over the pension input period.
No new registered pension arrangements can be established by the individual on or after April 6, 2012 unless it is solely to receive a transfer
People most likely to be affected will be high-earners with significant accrued/ accumulated pension rights. These people may already be affected or could find their pension rights escalate at a rate that takes them above the allowance by the time they retire.
The lifetime allowance is not only tested at the point at which benefits are taken but the range of benefit crystallisation also covers those who have crystallised funds and may stay there beyond age 75 or purchase an annuity at an earlier stage.
Some higher-paid individuals may have choices to make about their future planning. Not only affected by restriction on tax relief through the change in the annual allowance, the only way of avoiding the lifetime allowance may be to opt out of their employer’s pension scheme.
Opting out requires careful consideration and some analysis of the individual’s specific circumstances. The timing of any opt-out is also critical, to ensure it is effective.
Opting out to avoid tax will mean they forego future pension rights and may not be able to get the benefit of the employer’s contributions in any other way. It may also mean they lose other benefits where those are contingent on them being a member of the pension scheme.
There is a balance to be struck between the cost of exceeding the lifetime allowance and the benefits lost through opting out of pension planning. The sooner the analysis is undertaken the better.
A last word of warning - application for protection has to be made in a prescribed format to HM Revenue & Customs on or before April 5, 2012. That is they must have received it by then and there are no exceptions to the rule.
Mark Pearson is director, business development, at Origen Financial Services