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Technical View

Technical View


Welcome to this month’s Technical View, where we take a closer look at the reduction in the lifetime allowance (LTA) and the new protections that will coincide with this. This will be implemented in the Finance Bill 2016 from 6 April 2016.
 
What are the changes?
 
From 6 April 2016 the lifetime allowance will reduce from £1.25 million to £1 million, for the tax year 2016/17 and then this allowance will be increased in line with the consumer price index (CPI) from tax year 2018/19 onwards. With the introduction of this reduction in the LTA, the Finance Bill 2016 has also made provisions for transitional protections for pension scheme members who may need to protect their pension savings from the lifetime allowance tax charge, depending upon the value of their total pension funds.
 
The two forms of protection that will be available from 6 April 2016 are fixed protection 2016 (FP16) and individual protection 2016 (IP16) and will be available for UK residents with total pension savings in excess of £1 million or who they think will have pension rights worth over £1 million by the time they take their benefits.
 
FP16 and IP16 will operate in a similar way to FP2014 and IP2014. For those individuals who obtain FP16, they will have a LTA equal to £1.25 million and for those who obtain IP16 they will have a protected LTA of the value of their pension savings as at 5 April 2016 which will be subject to an overall limit of £1.25 million. Individuals can apply for both FP16 and IP16, with FP16 taking precedence over IP16.
 
The conditions for maintaining FP16 include that:

  • Individuals in defined contribution pension schemes must ensure that no further pension contributions are received by the scheme on or after 6 April 2016.
  • Individuals in defined benefits schemes must not accrue further benefits above a ’relevant percentage’ after 5 April 2016. The relevant percentage for defined benefit savings will normally be either the annual rate specified in scheme rules as of 9 December 2015 or CPI (if no rate is specified). 

Individuals with IP16 are able to continue contributing to a registered pension scheme, subject to the rules governing pension contributions for UK registered pension schemes. However, they would be subject to the LTA charge on any excess savings over their personal LTA when they take their benefits.
 
How will it work?
 
The Autumn Statement delivered on 25 November 2015 announced that from July 2016 HMRC would be introducing a new online service for pension scheme members to apply for FP16 and IP16. However because the new service is not available until July 2016, interim measures will be implemented for those individuals wishing to apply for FP16 and IP16 between 6 April 2016 and when the new system goes live in July, to give individuals temporary protections.
 
The interim process requires scheme members to contact HMRC in writing with details of their intention to rely on either IP2016 or FP2016.
 
FP2016

For FP16, in addition to their name and national insurance number, the scheme member will need to provide HMRC with:

  • a declaration that they do not hold primary protection
  • a declaration that they do not hold enhanced protection
  • a declaration that they do not hold fixed protection 2012
  • a declaration that they do not hold fixed protection 2014 


IP2016

For IP2016 the scheme member will need to provide HMRC with:

  • details of their relevant amount
  • a breakdown of their relevant amount (as at 5 April 2016) consisting of
    • Amount A: Pre A Day Pensions in Payment (£)
    • Amount B: Post A Day BCE’s (£)
    • Amount C: Uncrystallised Rights (£)
    • Amount D: Non UK Rights (£)
  • a declaration that they do not hold primary protection
  • a declaration that they do not hold IP14 

For both FP16 and IP16 records held by HMRC will be checked against the details of the individual to ensure the declarations are correct. If no other valid protection is held (that precludes the member from holding FP16 or IP16) the scheme member will be issued with a temporary reference number for their protection to provide to their pension scheme administrator.
 
Individuals who apply for protection and/or take benefits during this interim process to protect their pension savings must make a full online application once this becomes available to ensure their pension savings continue to be protected from the LTA tax charge. A permanent reference number will be issued when the full application is made that the individual must provide to their pension administrators.
 
If the scheme member fails to make a full online application, their application for FP16 or IP16 made under the interim process will not be valid and they will be liable to a LTA tax charge on their pension savings above the LTA.
 
We expect more information on this over the coming weeks but we hope we have given you some food for thought on this subject that will assist you with dealing with clients who may be affected by the reduction in the LTA. If you have further queries on the content of this edition or other technical queries then please contact the Technical e-helpdesk at technical@sanlam.co.uk.

Date issued: 13.01.16

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at January 2016 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

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Sanlam & Sanlam Investments and Pensions are trading names of Sanlam Life & Pensions UK Limited (SLP (Reg.in England 980142)) and Sanlam Financial Services UK Limited (SFS (Reg. in England 2354894)). SLP is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SFS is authorised and regulated by the Financial Conduct Authority. Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol BS1 2NH.

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