Is Lifetime Allowance Protection appropriate?
The standard lifetime allowance (LTA) is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge. As of 6 April 2016, the LTA reduced from £1.25 million to £1 million. Provided nothing changes, the LTA is set to stay at £1 million until April 2018 when it is scheduled to increase each year in line with CPI.
With the lower LTA threshold, there is a segment of individuals who, if not already addressed, should give consideration as to whether or not a form of LTA protection might be appropriate in their situation. Lifetime allowance protection locks in the level of your lifetime allowance. There are three protection programmes that remain available to individuals who do not currently hold protection or have not previously applied for protection in the past. Special attention should be paid to those who think they qualify under the IP2014 programme, noted below as an application for this is only available until 5 April 2017. These are:
- Individual Protection 2014 (IP2014) – This protection is available to an individual whose pensions were valued at £1.25 million or more on 5 April 2014. It gives individuals a protected lifetime allowance equal to the value of their pension savings on 5 April 2014, subject to an overall maximum of £1.5 million. As noted above, an application for protection until IP2014 is only available until 5 April 2017.
- Fixed Protection 2016 (FP2016) – This form of protection could be considered by any individual who wants to lock in a protected lifetime allowance of £1.25 million but by doing so must have ceased any contributions (made by themselves or their employers) to UK pensions from 6 April 2016. If any contributions were made from 6 April 2016 onwards, fixed protection will not be available.
- Individual Protection 2016 (IP2016) – This form of protection is available to those with funds valued at £1 million or more on 5 April 2016. It protects the value of the fund on that date up to a maximum of £1.25 million. Unlike Fixed Protection, contributions can continue post 5 April 2016 without the risk of losing protection.
The decision as to whether any and what LTA protection is appropriate is based on personal circumstances and a number of factors. The key factors in the decision making process can be outlined as follows:
- Number of years until retirement – A longer timeframe will result in a more uncertain projected outcome. This will make it more difficult to know which option might result in the most beneficial scenario.
- Expected investment returns – An individual’s attitude to risk is a key factor to consider as the rate of return used in any sort of projection will directly impact the compound growth effects over time.
- Value of pension benefits on 5 April 2016 – The value of any pension assets as of this date determines what options are even available to consider. The closer the pension value is to £1.25 million on this date, the more valuable individual protection is since it offers nearly the same protection benefit but still afforded the flexibility of future contributions, should you have been unable to avoid them.
- Flexibility of employee benefits/employer contributions – Where there haven’t been employer contributions, or the employer contributions were redirected, the decision around protection options can be relatively straightforward. But, if the employer did not or does not allow any sort of flexibility, this inevitably creates a layer of complexity around the decision. In this case, one must assess the trade-off of any forgone benefits under fixed protection versus securing individual protection or doing nothing at this point in time.
The right decision is an individual one and many factors are not independent from one another. It is important to give consideration to all factors in light of your own objectives and circumstances. Seeking personal advice will almost certainly be beneficial.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.