The reduction in the lifetime allowance for private pension savings, due from the start of the 2014-2015 tax year, has presented advisers with further tax year-end planning issues...
Here are some of the most frequently asked questions, and their answers. Let's start simple...
Q1 What is the change?
The lifetime allowance will be reduced to £1.25m from the current threshold of £1.5m from the start of the next tax year. For the future, if clients crystallise pension savings in excess of the reduced lifetime allowance tax threshold, the excess will be subject to a tax charge of:
• 55% if taken as a lump sum, or
• A withholding tax of 25% if the excess is taken as additional income, on which the client will be subject to income tax at their highest rate(s), creating, for a higher rate tax payer, an effective rate of tax of 55%.
Q2 What can clients do to avoid or reduce the charge?
The government has provided two solutions for clients to protect the future value of their pension savings, up to certain thresholds, from a lifetime allowance tax charge.
The two forms of protection, which are not mutually exclusive, are known as fixed protection 2014 and individual protection.
|Key points||Fixed protection 2014||Individual protection|
|What is the maximum level of protection available?||Clients will be protected from a lifetime allowance tax charge based on a future lifetime allowance of £1.5m||Clients will be protected from a lifetime allowance tax charge based on the value of their pension savings as at 5/4/2014. The minimum value at that date must be £1.25m, with an upper monetary protection threshold of £1.5m.|
|Can clients accrue further benefits from 6/4/2014 and still keep protection?||No. There can be no further money purchase contributions paid on or after 6/4/2014. For members of final salary schemes, the protection will continue to apply, provided their benefits do not increase by either the increase in CPI or by the rate of increase allowed in the scheme rules as at 10 December 2012.||Yes. Benefits can continue to be built up and contributions can still be made into registered pension schemes.|
|Is this form of protection available if a client has already registered for other forms of protection?||The only other form of protection a client can have alongside fixed protection 2014 is individual protection.||Individual protection is available for clients who have registered for enhanced protection, fixed protection 2012 or fixed protection 2014.|
|When will clients need to register for this protection?||A valid application must be received by HMRC no later than 5 April 2014. Application can be made in paper form or online.||Applications for individual protection cannot be made until after the legislation is enacted in the Finance Bill 2014. This is likely to be from August 2014 at the earliest and clients will have three years from the 6 April 2014 in which to register.|
Q3 What are the key advice issues to be considered?
Additional funding in 2013-2014 tax year
For clients thinking of registering for fixed protection 2014, any additional funding must be completed by the end of this tax year. This could include:
• Maximising current annual allowance of £50,000
• Making additional contributions in respect of carry forward of unused annual allowances from the pension input periods ending in the 2010-2011 to 2012-2013 tax years
• Adjusting pension input periods to advance fund the 2014-2015 annual allowance of £40,000
These could also be action points for clients where individual protection could apply. The planning could be used to create eligibility for individual protection, i.e. increasing the value of pension savings above the £1.25m lower threshold or to increase the level of individual protection that could be registered.
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