The pensions Lifetime Allowance, which is the most tax-efficient level of benefits that can be built up within a pension, is due to fall from £1.8m to £1.5m on the 6th April 2012. From this date any excess benefits may be taxed at up to 55%, on reaching a “Benefit Crystallisation Event”, often retirement, but as detailed below could be any of the 11 BCEs.
The obvious case where an individual might need Fixed Protection is where they have pension benefits at or over £1.5m, but here are five less obvious cases. We’ve identified:
- Where they expect their fund to grow quicker than the lifetime allowance: we know the Lifetime Allowance is fixed at £1.5m until 2016, and whilst we do not know what increases will be applied thereafter, Inheritance Tax nil-rate bands illustrate that it is quite possible that an increasing number of individuals will be hit by Lifetime Allowance charges. An individual with a fund of £1m achieving 7% growth per annum will have a fund of over £1.4m before the Lifetime Allowance limit is next reviewed.
- Those with defined benefit pensions: When a defined benefit scheme is taken, a multiple of 20 is used to calculate the percentage of the lifetime allowance used, any pension commencement lump sum is also added. Any individual with benefits of £50,000+ should be considering Fixed Protection, possibly lower.
- Those who have taken benefits after 6th April 2006: If benefits have been taken after 6th April 2006, some of the lifetime allowance will have been used. Benefits are not only tested when they are drawn, in fact there are a total of 11 “Benefit Crystallisation Events”, the most relevant in this case being death, annuitisation, or reaching age 75. For the reasons given in example 1, due to some of their lifetime allowance being used, and no wish to make ongoing contributions, we have registered individuals with funds as small as £600,000 for Fixed Protection.
- Those who have taken benefits before 6th April 2006: A factor of 25 is generally applied to income taken before 2006, and for those taking less than maximum drawdown, this would be applied to the maximum permitted withdrawals. It is therefore possible to have used Lifetime Allowance, without actually receiving income.
- Death in service: Many death-in-service schemes will be tested against the lifetime allowance on death. Whilst dependent’s pensions provided by DIS schemes are normally exempt, not all scheme rules allow for this. Individuals with significant death in service benefits, should consider Fixed Protection.
The raft of factors pulling in each direction, and the very short deadline to opt for fixed protection make this an important area on which to seek advice. It is our view that many more people will be affected by the lifetime allowance charges than initially expected – should you be in any doubt, you should seek advice from an appropriately qualified pension specialist.