Information taken from HMR&C document, entitled:
Pensions: Restriction of pensions tax relief
On 5 December 2012 the Government announced that for tax year 2014-15 onwards:
• the annual allowance for pensions tax relieved savings will be reduced from £50,000 to £40,000
• the standard lifetime allowance for pensions tax relieved savings will be reduced from £1.5 million to £1.25 million
• a transitional ‘fixed protection’ regime will be introduced for those who believe they may be affected by the reduction in the lifetime allowance.
Legislation will be introduced in Finance Bill 2013 to make these changes and will be published in draft on 11 December 2012.
The Government also announced that they will discuss with interested parties whether to offer a personalised protection regime in addition to a fixed protection regime.
What change is being made?
The lifetime allowance is to be reduced from £1.5 million to £1.25 million with effect for tax year 2014-15 onwards.
What is the lifetime allowance?
The lifetime allowance is the maximum amount of pension saving you can build up over your life that benefits from tax relief. If when you take your pension benefits these are worth more than the lifetime allowance you'll pay a tax charge (the lifetime allowance charge) on the excess. For further information on the lifetime allowance rules see www.hmrc.gov.uk/pensionschemes/understanding-la.htm
What is the lifetime allowance charge?
The lifetime allowance charge is a tax charge paid on any excess in the value of your pension benefits over the lifetime allowance limit. The rate depends on how this excess is paid to you. If the amount over the lifetime allowance is paid as a:
• lump sum - the rate is 55 per cent
• taxable pension - the rate is 25 per cent
How do I know if I am affected by this change?
The way your benefits are tested against the lifetime allowance depends on the type of pension scheme paying the benefits.
If you have a defined contribution (money purchase) scheme then it is the amount of your pension pot when you take benefits.
If you have a defined benefit scheme it is your pension x 20 plus any separate tax free lump sum. For a defined benefit scheme a £1.25 million lifetime allowance is therefore equivalent to a pension of £62,500 per annum if no tax free lump sum is taken or about £46,000 if the maximum tax free lump sum is taken.
What is fixed protection 2014?
Fixed protection 2014 will work in the same way as the existing fixed protection regime which was introduced from April 2012 when the lifetime allowance was reduced to £1.5 million.
Individuals who apply for fixed protection 2014 will have a lifetime allowance of the greater of £1.5 million and the standard lifetime allowance (£1.25 million from April 2014), provided that from April 2014:
• If they are in a defined contribution (money purchase) scheme, they make no further pension contributions to the scheme and nor are any contributions paid on their behalf – including any by their employer;
• If they are in a defined benefit or cash balance scheme, they stop accruing benefits above a “relevant percentage”. This is broadly defined as either the annual rate specified in scheme rules for the revaluation of accrued rights, or CPI (if no rate is specified).
There are a number of other circumstances when fixed protection 2014 can be lost, for example where there is an impermissible transfer. These circumstances are the same as for the existing fixed protection, (see link below for further information).
Any pension savings above £1.5 million will be subject to a lifetime allowance charge when benefits are taken.
More information on the existing fixed protection regime can be found at www.hmrc.gov.uk/pensionschemes/pension-savings-la.htm#4
When can individuals apply for fixed protection 2014?
Individuals will be able to apply for fixed protection 2014 after the legislation comes into force, which is expected to be in summer 2013. This will include legislation in Finance Bill 2013 as well as supporting regulations.
A simple form will be available on the HMRC website after the legislation comes into force, which will require details of the name, address and National Insurance Number of the individual. The signed form must be received by HMRC by 5 April 2014.
Who can apply for fixed protection 2014?
Anyone with UK tax relieved pension savings can apply for fixed protection 2014 regardless of the current level of their pension savings, providing they don’t have one of the existing protections from the lifetime allowance (primary, enhanced or fixed protection).
What tax free lump sum will individuals with fixed protection 2014 be entitled to?
It is proposed that individuals with fixed protection 2014 will be able to take a tax free lump sum at the time they take a pension. The maximum lump sum that can be taken is up to 25% of their pension rights, subject to an overall limit of 25% of £1.5 million. However, some scheme rules may only allow a smaller tax free lump sum to be taken.
What is the personalised protection option?
We will be discussing the feasibility of this option with interested parties in the next few months. It is anticipated that personalised protection will give individuals a lifetime allowance of the greater of the value of their pension rights on 5 April 2014 (up to an overall maximum of £1.5 million) and the standard lifetime allowance (£1.25 million from April 2014). However unlike with fixed protection 2014, individuals with personalised protection can carry on saving in their pension scheme without losing their protection. Any pension savings above the individual’s lifetime allowance will be subject to a lifetime allowance charge when benefits are taken. Personalised protection will only be available to those with pension pots over £1.25 million on 5 April 2014.
Will I be able to apply for both fixed protection 2014 and personalised protection?
The question of whether individuals will be able to apply for both fixed protection 2014 and personalised protection will form part of the discussions we will be having with interested parties in the next few months.
Are there any other changes being made to the lifetime allowance legislation?
It is proposed that where an individual dies before 6 April 2014, and any lump sum death benefits are not paid until on or after 6 April 2014, then the lump sum will be tested against the lifetime allowance at the time of the individual’s death rather than at the point the lump sum is paid.
What change is being made?
The annual allowance will be reduced from £50,000 to £40,000 for the tax year 2014-15 onwards.
What is the annual allowance?
The annual allowance is the maximum amount of an individual’s annual pension savings that can benefit from tax relief. For further information on the annual allowance rules see www.hmrc.gov.uk/pensionschemes/aa-ps.htm
What is the annual allowance charge?
If your annual pension savings exceed the annual allowance limit, income tax applies to the excess at your marginal rate of tax (known as the annual allowance charge).
For further information on the annual allowance rules see http://www.hmrc.gov.uk/pensionschemes/understanding-aa.htm
How will I know whether I am affected by this change?
You will only be affected by the change if your total pension savings made in ‘pension input periods’ that end in a tax year exceed the annual allowance plus any available unused annual allowance that you can carry forward from the three previous tax years.
The way your savings are tested against the annual allowance depends on the type of pension scheme.
• If you have a defined contribution (money purchase) scheme, then the total amount of contributions made by you or on your behalf (including any employer contributions) for a pension input period will count towards the annual allowance limit.
• If you have a defined benefit scheme, your pension savings for the year is broadly the increase in the value of your promised pension over the pension input period. You need to find out the value of your promised pension benefits at the start and end of the pension input period. The difference between the two values is the amount of your pension savings.
Your scheme administrator must tell you if your pension savings in their scheme are more than the annual allowance. If you don't get a pension savings statement you can still ask them to give you the information. For further information on how to establish the amount of pension savings for a year, see http://www.hmrc.gov.uk/pensionschemes/annual-allowance/pension-input.htm
Will this change affect pension savings made before 6 April 2014?
The amount of pension savings that will count towards the annual allowance for 2014-15 is the total of savings made in ‘pension input periods’ that end in the tax year 2014-15. This period usually covers 12 months but doesn't have to match the tax year. If for example your scheme has a pension input period of 1 January to 31 December, the pension input period ending in tax year 2014-15 will start on 1 January 2014 and any savings in the scheme from that date to 31 December 2014 would be subject to the 2014-15 annual allowance.
If you're saving into more than one scheme or even into more than one pension pot in the same scheme you may have several different pension input periods. Your pension scheme administrator can tell you what your pension input periods are.
For further information on which tax year pensions savings count towards, see http://www.hmrc.gov.uk/pensionschemes/understanding-aa.htm#2
What are the carry forward rules?
If your total pension savings for the tax year are more than the annual allowance you can carry forward any unused allowance from the previous three years to the current tax year. You only have to pay tax on any amount of pension savings in excess of the total of the annual allowance for the tax year plus any unused annual allowance you carry forward from the previous three years. See www.hmrc.gov.uk/pensionschemes/calc-aa.htm#3 for further information.
Are there any changes to the carry forward rules?
No, there are no proposed changes to the carry forward rules. This means that the amount of any unused allowances arising from the tax years 2011-12 to 2013-14 and available for carry forward to 2014-15 and subsequent years will still be based on the £50,000 limit.
The effect of this is that for 2014-15 you will be able to carry forward up to £50,000 unused annual allowances from each of the tax years 2011-12 to 2013-14.
For 2015-16 you will be able to carry forward up to £50,000 unused annual allowances from 2012-13 and 2013-14, and £40,000 from 2014-15.
For 2016-17 you will be able to carry forward up to £50,000 from 2013-14 and £40,000 from 2014-15 and 2015-16.
Will the pension scheme still be able to pay my annual allowance charge?
This change will not affect the facility for a pension scheme to pay the annual allowance tax charge in return for a reduction in your promised benefits.
Under this facility, the pension scheme administrator can pay the tax for you if your annual allowance charge for the tax year is more than £2,000 and your pension savings in that scheme for the same tax year are more than the annual allowance.
If you want your scheme administrator to pay your annual allowance charge for 2014-15 you must normally tell the scheme administrator by 31 July 2016 unless you take all your benefits in which case you must tell the scheme administrator before you take these benefits. For further information on these arrangements, see http://www.hmrc.gov.uk/pensionschemes/calc-aa.htm
Have there been any other changes to the annual allowance rules announced?
No, the only change announced is the reduction to the amount of the annual allowance to £40,000 for tax year 2014-15 onwards.