With a little over four months to go until the new tax year and the reduction of the lifetime allowance from £1.25 million to £1 million the precise terms and conditions which will govern the protection of those with benefits above, or close to the lifetime allowance are yet to be defined.
There have been several contradictory and confusing updates from HMRC in their pension scheme new letters 71, 72 and 73 (click for links) but despite originally suggesting that protection would be entirely self assessed they have now proposed that there will be an on line self assessment service, but only available from July 2016.
This ultimately means we are four months away from the deadline, without final rules, legislation or application process, but from previous experience it would seem that those relying on fixed protection 2016 should have elected to opt out of any pensions from 5th April 2016, and ensure no contributions or other accrual occurs after this date. From a practical point of view this may mean actually electing to leave pensions far earlier than one might expect, as many employers will make contributions a month or so in arrears of when they are deducted from payroll.
Additionally individuals relying on fixed protection 2016 (or indeed those that currently rely on fixed protection 2012, or fixed protection 2014) should make quite sure that they are not “auto enrolled” into a pension scheme in the future which is a legal requirement imposed on most employers.
Individual protection 2016 is more flexible as it does allow contributions or accrual beyond this date but individuals will likely need a statement of their benefits from all plans as at 5th April 2016 to apply.
As to the reasons why this process has changed we can only speculate, but it does seem strange that HMRC are not issuing certificates but instead only a lifetime allowance reference number, and are so late in preparing the forms, which in previous years we had the fixed protection forms in advance of the 5th April deadline, and individual protection forms in the August after. I strongly suspect that the HM Treasury consultation “strengthening the incentive to save” has a lot to do with this, and whilst it is entirely speculation, I wonder whether HMRC are party to conversations that are not in the public domain, specifically in respect of further changes to the lifetime allowance that may reduce or eradicate the need for these protections.
Notwithstanding this, the lack of clarity of the rules from HMRC does not reduce the requirement for individuals to start to think about the planning that they should undertake. At the same time that the lifetime allowance is reducing the annual allowance is also reducing for many higher earning individuals. This means that some will be hit by a double tax charge from the annual allowance as they build up benefits, and the lifetime allowance when they draw them. For these reasons we would strongly recommend that those who have concerns they may be hit by the lifetime allowance over their likely retirement timeframe should seek advice.
As in previous years those affected may not be immediately obvious as as explained in previous blog posts the lifetime allowance has decreased in both real and monetary terms and even those with funds significantly under the current lifetime allowance may want to think about electing for fixed protection 2016 especially if they may hit the lifetime allowance several years hence.