Options to mitigate the changes to UK Pension Lifetime Allowance
Written by Stewart Massey on 23 November 2016
The Pensions Life Time Allowance (LTA) has reduced further, from £1.8m a few years ago, to £1m since the beginning of the 2016/2017 tax year.
This means that any UK pension fund that is over that figure will be subject to excess tax at 55% on pension commencement lump sums and 25% on income taken (the net income would then be assessable to income tax at your marginal tax rates, so a tax on tax effectively).
It is possible to put some element of protection in place as follows:
If an individual has less than £1m in pension benefits at 5/4/2016 they can apply for FP. This will allow the total pension fund to grow to £1.25m over time and protect up to that figure before any excess tax would be payable further down the line. Please note that no further contributions could be made.
Individual Protection 2016
If the individual held pension assets of more than £1m at 6/4/2016 they can apply for IP. This will allow contributions to continue, when UK resident again, until the pension fund value reaches £1.25m.
Individual Protection 2014
It is possible to apply for this protection until April 5th 2017. To qualify, the individual must have had pension assets of more than £1.25m at 5/4/2014. This would preserve the LTA at the £1.5m level and permit ongoing contributions and further defined benefit accrual.
It is important to understand that growth achieved on UK defined contribution schemes, such as SIPPs will continue to add to the figure measured by the LTA (it is not based purely on contributions and does include the full value achieved). If there are assets that provide ‘final salary’ benefits then the calculation for those benefits is 20 x the annual pension at retirement, before commutation for lump sum benefits.
How expats can mitigate (in full or in part) the effects of the reduced Pension Lifetime Allowance
Transfer to QROPS while non-UK resident is a very strong option. On a transfer, the Cash Equivalent Transfer Value (CETV) or Relevant Transfer Amount (RTA) are measured against the LTA and then never again.
The major bonus here is that it is only the UK tax-relieved funds that HMRC are interested in. Once a transfer has been made, any future growth achieved is irrelevant for the purposes of the LTA. This is a crystallization event.
Remaining within the UK pension system allows any growth to contribute to the overall fund that is measured against the LTA. Any annual increases to preserved ‘final salary’ benefits, prior to benefits being taken, also impact on the LTA calculation.
Request free and independent pension consultation
If you are unsure about the changes to the Pension Lifetime Allowance and would like to know your options in full, our free pension consultation is designed to give you all the information you need. Simply enter your details using the form to request your free pension consultation who will be able to provide you with:
- Answers to any pension or financial questions you have
- A detailed assessment of your pension situation
- Options relating to the changes to the Pension Lifetime Allowance
- Recommendations on how you could reduce your tax burden, now and in your retirement
- Opportunities to reduce the inheritance tax exposure on your estate
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