You may be aware that the Lifetime Allowance (LTA) places a limit on the value of benefits that can be taken from pensions without being subject to an extra tax charge. As of 6th April 2016, the LTA reduced from £1.25 million to £1 million, with the current proposal that it increases in line with inflation from 2018/19.
By now you will have hopefully established with your adviser whether this reduction in the LTA is likely to affect you. Essentially, this will be true if you have pensions valued over £1 million or are likely to have pensions valued over £1 million by the time you retire. If this is the case, then ‘transitional protection’ should be considered.
The two forms of transitional protection available are called ‘Fixed Protection 2016’ and ‘Individual Protection 2016’.
Fixed Protection 2016 allows you to keep the £1.25 million LTA. There is no minimum pension value required to apply for the protection, however you must have ceased all contributions to any pensions by 5th April 2016 and any increases in final salary pensions cannot exceed a given percentage each year.
This means that, with Fixed Protection 2016, you will by now need to have stopped all regular and one off contributions. It is possible for your pension to continue to grow through investment performance.
Individual Protection 2016 is only available for those whose pensions were worth more than £1 million on 6th April 2016. When you apply for Individual Protection, your LTA will become the value of your pensions on 6th April 2016, but you can continue to make pension contributions or accrue further benefits in an occupational pension.
How do I apply for transitional protection?
For both forms of protection, you can as of now register online with HMRC for a transitional protection reference number. However, for Fixed Protection 2016, you must have ceased contributing or accruing benefits prior to 5th April 2016.
Prior to the new online system becoming available, there was the option to make an interim application from 6th April by writing to HMRC. This was mainly aimed at individuals who wished to take benefits before the system was ready, but still benefit from transitional protection. Regardless of whether you have already written to HMRC, you must now apply for a permanent reference number using the online system.
Remember: Most people will be automatically enrolled into a workplace pension. If you already have or expect that you will need to apply for Fixed Protection it is important to remember to opt out of an auto-enrolment scheme within one month of being enrolled.
If you are unsure about any of the information above, or think your pensions may be close to or exceed the LTA, please contact your usual adviser at Wise Investment.
Please note – this post contains the personal opinions of Joe Cooper as at 10th August 2016, and is not intended as financial or investment advice. Should you wish to discuss anything raised in this post further, please contact your usual financial adviser.