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. Currently at £1.25 million, the LTA will reduce to £1 million beginning 6 April 2016. Provided nothing changes, the LTA is set to stay at £1 million from 6 April 2016 until April 2018 when it is scheduled to increase each year in line with CPI.
With the LTA threshold getting lower, many more people will find the need to consider 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. 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. An application for protection until IP2014 is available until 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 cease any contributions (made by themselves or their employers) to UK pensions from 6 April 2016. If any contributions are made from 6 April 2016 onwards, fixed protection will be lost.
Individual Protection 2016 (IP2016) – This form of protection will be available to those which funds valued at £1 million or more on 5 April 2016. It will protect the value of the fund on that date up to a maximum of £1.25 million. Unlike Fixed Protection, contributions can continue 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 will determine 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 will be since it will offer nearly the same protection benefit but still afford flexibility of future contributions should you be unable to avoid them.
• Flexibility of employee benefits/employer contributions – Where there are no employer contributions, or the employer contributions can be redirected, the decision around protection options can be relatively straightforward. But, if the employer does not allow any sort of flexibility, this inevitably creates a layer of complexity around the decision. 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.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.