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HMRC publishes new lifetime allowance pension protection rules

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HMRC has published details of a new “individual” protection regime which will allow people with pension savings worth more than the new £1.25m lifetime allowance to protect the value of their pot and continue contributing to a pension scheme, subject to the relevant charge. 

Chancellor George Osborne confirmed the Government will cut the lifetime allowance from £1.5m to £1.25m from April 2014 in his Autumn Statement in December. A charge of up to 55 per cent applies on assets above the limit.

At the time, the Government said it planned to introduce two new protection regimes – fixed protection and individual protection – to ease the transition to the new savings limit.

The proposed fixed protection rules will allow individuals to lock-in to a lifetime allowance of £1.5m, provided they do not make any further pension contributions. Investors will need to apply for the new protection before 6 April 2014.

Under the individual protection regime, savers will be able to apply for a personalised lifetime allowance, up to a maximum of £1.5m, based on the value of their pension pot at 5 April 2014. Investors will have three years to apply for individual protection from 6 April 2014.

Anyone who takes out individual protection to protect the value of their pot will still be able to contribute to their pension, although these extra contributions will be subject to lifetime allowance charges.

HMRC says this option is likely to attract people who receive large employer pension contributions which cannot be converted into other benefits, such as higher pay. 

HMRC says: “The recently announced reduction in the lifetime allowance to £1.25m is expected to impact a wider population than the previous reduction to £1.5m. 

“This population may not have previously required regular financial advice to make an informed decision about the suitability of fixed protection. 

“Offering the option of individual protection as well as fixed protection would therefore provide greater flexibility for this group to choose the most appropriate protection regime for their personal circumstances and allow them to remain an active member of their pension scheme if they wish.”

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. What a muddled piece of reporting. The limit is £1.5 now reducing to £1.25 in April 2014.
    The idea of allowing contributions thereafter to be taxed at 55% is about as daft as his Funding for Lending.

    NIC for the higher earning employee would be 2% and for the employer 13.8%. Additional rate tax will be 45%.

    So if an employer paid (say) £10,000 pension. The employee would receive £4,500 of which £1,125 would be PCLS leaving £3,375 to add to his annuity or draw down.

    However if the employer paid it as bonus or salary it would cost the employer and additional 13.8%, so assuming he knocks this off the payment then £8,620 is received on which 2% NI is payable and 45% tax by the employee – leaving about £4,569 (if my maths and understanding is correct). So he gets all this in his hand. This is more than the net pension and a 306% difference in cash in hand.

    Who on earth would opt for the pension? Please would someone correct me if either my understanding or arithmetic is awry.

    If the forgoing is substantially correct then yet again boy George has demonstrated what an idiot he really is. If I have it wrong I have just proved that I’m thick.

  2. Andrew Roberts 11th June 2013 at 6:21 pm

    Harry

    Yes your maths is substantially correct (the amount net of employers NIC might be better expressed as 10000 / 1.138 = 8787).

    The key purpose of Individual Protection though is for employees who don’t have the option of taking a cash in hand alternative for pension build up. This is more likely for those left in defined benefit schemes who have a pay rise (and so the value of their benefits increase). Some lucky employees also get offered non contibutory pension schemes but no cash alternative.

    I think Individual Protection could also be useful as a fallback for people who opt for Fixed Protection i.e. if they contribute by mistake they would fallback to their protected LTA rather than the standard, or if their fund value falls they may be able to top back up to their protected fund.

  3. @Andrew

    I’m grateful (and relieved) for that. However on the assumption that employers are also savvy businessmen, they have the ideal opportunity of coming to an agreement with the employee for him to withdraw from the scheme in those circumstances and taking the cash in lieu.

    The employer saves and the employee gains. I can’t really understand why they wouldn’t do this.

  4. Harry, The £4500 would be a lump sum. Also if I get matched contributions from my employer then the cost of £10,000 might only be £5,000. Had this been taxed at my marginal rate and subject to NI, I would be better off taking the hit on the LTA charge. Also consider that with auto enrolment and compulsory employer contributions this is not unlikely.

  5. Ah more pensions simplification!

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  7. I am very surprised that they haven’t decided to increase the valuation factor for Final Salary Schemes as well at the same time. With current annuity rates where they are, the 20 times factor is very generous to the retiree. Maybe it would affect too many Civil Servants – if I was cynical !

    Enjoyed reading your comments above – they have helped me understand it.

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