Another tax year, and we see another reduction in the lifetime allowance and personal allowance for pension benefits. Come April 2014, these will reduce to £1.25m and £40,000 a year respectively. Whilst these changes won’t affect all of your clients, there will be some who will be caught. And these clients need to act now to make sure they protect what pension benefits they have already built up.
Paying in more than £40,000
Although the personal allowance will fall from £50,000 to £40,000 from April 2014, those who want to pay in more than that do have some options. By using carry forward someone paying in a lump sum after April 2014 with a pension input period (PIP) ending in 2014/15 could pay in up to £190,000, depending on the size of the pension contributions they have made over the previous three years.
Protecting pension benefits
Those who have already built up benefits over £1.25m, or are likely to do so, will want to protect these against the fall in lifetime allowance. These people are spoilt for choice; they can use two different types of protection – individual protection 2014 and fixed protection 2014.
How do the protections work?
Fixed protection allows clients to keep a lifetime allowance of £1.5m, but only as long as they do not make any further contributions or have benefit accrual in a defined benefit scheme above a ‘relevant percentage’.
If in the future, legislation is introduced to increase the standard lifetime allowance above £1.5m, then fixed protection is revoked, and individuals will be able to begin contributing to pensions again.
The legislation for individual protection is not yet finalised – instead it’s expected to be included in the Finance Bill 2014, which will become law about July 2014.
However, we do know individual protection is designed to protect benefits between £1.25m and £1.5m. Those with benefits valued above £1.5m will still be able to apply for it, but protection will be capped at £1.5m. The individual protection 2014 amount will become their personal standard lifetime allowance, and anything above this amount will be taxed at a rate of 55%.
What protections should clients apply for?
Some clients will have more influence over their remuneration package than others. If, for example, they are able to negotiate a higher salary in return for no further employer pension contributions, then they may want to opt for fixed protection.
But others won’t have this option. If they benefit from employer contributions but are unable to take an alternative (for example higher salary or dividends or other benefits) then they may want to consider individual protection. Even though they will pay 55% charge on anything above their personal LTA, they will still receive 45% of anything built up, and that is better than 100% of nothing.
Fixed protection takes precedence over individual protection, but if your clients have funds above £1.25m it’s worth applying for both. So if fixed protection is broken – for example they pay in a contribution because investment markets have been poor and they want to boost the value of their pension fund before retirement – then they can then rely on individual protection.
Fixed protection and automatic enrolment
Employers are required on their staging date to automatically enrol all qualifying employees into a pension scheme and to pay contributions for them. People who have fixed protection 2014 need to make sure they opt out of the automatic enrolment pension scheme within one month, otherwise their fixed protection will be lost. They will be automatically re-enrolled every three years, and will need to make sure they opt out each time. The obligation is on the individual to opt out – no-one else can do this for them.
What should clients do now?
If your clients are opting for fixed protection then it may be worthwhile maximising pension contributions before 5 April 2014. They can carry forward any unused annual allowances (subject to having sufficient earned income) to make a significant pension contribution now.
They have until 5 April 2014 to make their bid for fixed protection, but until 5 April 2017 to apply for individual protection.
Conclusion
As we see further cuts in the pension benefits, protecting what clients have already built up becomes even more important, and even more complicated.
Fixed protection 2014 and individual protection 2014 give clients options about how to protect their benefits, depending on how much they have and whether they are able to re-negotiate their remuneration package to replace the value of employer pension contributions.
As the deadline of 5 April 2014 approaches, you can help your clients make sure they are in the best position to protect their future retirement income.
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