Among the many changes that will affect pensions in the new tax year, it would be easy to forget one that will only take place in April 2012 but should form an important part of pension planning for some clients immediately. That is the reduction in the lifetime allowance for pensions from £1.8m to £1.5m and the possibility of a new fixed protection for those who may be affected by it.
The lifetime allowance effectively sets an upper limit on tax-advantaged retirement savings, with any excess taxed at 55 per cent if taken as a lump sum or 25 per cent if taken as income, which is then itself taxed.
Many advisers have clients who have applied for enhanced or primary protection against the lifetime allowance based on their pensions built up before A-Day (April 6, 2006) and they are largely unaffected by the lifetime allowance reduction.
Fixed protection is designed for those who were funding towards the £1.8m lifetime allowance and who already have more than £1.5m in their pension or expect to reach that level before retirement.
Those who register for fixed protection will retain an individual lifetime allowance of £1.8m. However, they will have to stop all pension contributions and accrual before April 6, 2012. Unlike primary protection, their individual lifetime allowance will not increase in line with the standard one in future and will only go up if the standard allowance ever rises above £1.8m.
Since no increase to the standard allowance is expected before 2016 – and there is no guarantee it will go up then – it is safe to assume their individual allowance will remain at £1.8m for the foreseeable future.
Advisers should discuss the possibility of fixed protection with clients as soon as poss- ible as they must apply for it during the 2011/12 tax year. This is different from primary and enhanced protection where it was possible to apply for three years after A-Day. Application forms will become available when the Finance Bill receives royal assent, probably in June or July.
Clients will have to decide whether fixed protection is right for them in time to submit their application to HM Revenue & Customs by April 5, 2012. They do not need to provide a current valuation of their pensions.
Clients who are planning to apply for fixed protection may also want to make substantial pension contributions in the 2011/12 tax year. These could be limited by the reduced annual allowance of £50,000 but there may well be ways to pay in more than this.
For example, the new carry-forward facility could potentially allow those who have paid less than £50,000 into their pension pots between the 2008/09 and 2010/11 tax years to carry forward the unused amounts. This includes those whose contributions in the last two years were restricted because of the special annual allowance.
It may also be possible to use two £50,000 annual allow-ances in the year – one for a pension input period ending in tax year 2011/12 and one for a Pip ending in 2012/13.
If necessary, it will be possible to change the dates for previous Pips retrospectively. This must be done before the finance act receives royal assent.
Advisers should make contact with clients who may be affected by the lifetime allowance reduction as soon as possible so that plans can be made and implemented early in the tax year. They will also then have the opportunity to consider alternative investments for clients who will draw a line in the sand on pension contributions in April 2012.
Ian Naismith is head of pensions market development at Scottish Widows