HMRC has just issued a reminder that the deadline to protect large pension funds from the decrease in the lifetime allowance is fast approaching.
There is a limit to the size of a pension pot that qualifies for tax breaks. If your pension fund exceeds this limit, the lifetime allowance, then there will be a tax charge on the excess of 55% if taken as a lump sum (or 25% if taken as a pension). On 6 April 2012, the lifetime allowance was reduced from £1.8m to £1.5m and on 6 April 2014 it’s being reduced again to £1.25m.
Note. If you previously elected for “primary” or “enhanced” protection, they won’t be affected by the reduction in the lifetime allowance. The new limit will also not apply if they elected for “fixed protection 2012”.
Fixed protection 2014.
If you are fortunate enough to have a pension fund in excess of £1.25m, then you can elect for “fixed protection 2014” (FP2014). By doing this, you can keep the previous lifetime allowance of £1.5m. Any funds in excess of £1.5m will still attract tax charges but, potentially, electing for fixed protection could save you up to £137,500 (55% x £250,000) in tax on excess pension funds between £1.25m and £1.5m.
Problem. A potential pitfall is that in order to register for FP2014, you will have to stop making pension contributions and cease accruing further benefits. This is most likely to be an issue if you’re in a generous defined benefit scheme. You’ll also need to make sure you’re not auto-enrolled into a new pension scheme (you’ll need to opt out) or you’ll lose the FP2014.
Tip. If your fund is between £1.25m and £1.5m, you could consider making additional contributions before 6 April 2014 and then applying for FP2014. Just make sure you’re aware that you shouldn’t go over the pension contribution annual allowance for 2013/14 of £50,000 (although you can carry forward unused contribution allowances from the previous three years).
There isn’t much time – if the total value of your pension fund is over £1.25m and you’re happy to stop making contributions and accruing benefits, then you need to apply for FP2014 by 5 April 2014. You can do this online through HMRC’s website or by downloading Form APSS228 from HMRC. Once your application is accepted, you’ll receive a certificate which you’ll need to show to their financial advisor/pension scheme administrator.
Tip. Use HMRC’s lifetime allowance checking tool to see whether your clients should apply for FP2014.