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Technical View

Technical View

Special Feature Part 3

Welcome to the third instalment of our April 2016 Special Features update, where we take a look at the Lifetime Allowance, once again under attack with a further reduction coming into effect from 6th April 2016.
The key here is protection.  For those not wanting to get caught out by an LTA charge, we have produced a handy flowchart to help you guide your clients through the current options available.
Note that in order to avoid losing Fixed Protection 2016 (FP16) pension contributions must cease before 6th April 2016.

The Protection Racket: Will your clients be affected by yet another cut to the Lifetime Allowance?

Note that the following scenarios (and flowchart overleaf) only take defined contribution (DC) pension savings into account.  For those with defined benefit (DB) pension savings, there will be further elements to consider.  They also do not cover individuals who already have existing protections in place.

Scenario 1

Client has pension savings of less than £1 million and is not expected to reach this level in the near future.  In this instance, no protection is necessary.  If the client’s pension savings are close to £1m, they may want to maximise their contributions (if able to do so) pre 06/04/2016 and then apply for protection (see our previous Technical View Special Feature Part 2 for more details on maximising contributions).  Alternatively if they are 55 or over, they could crystallise some or all of their funds pre 06/04/2016 and have it tested against the current LTA of £1.25m.  Even if they only crystallise part of the fund, this will leave them a higher percentage remaining when benefits are later tested against the £1m LTA (e.g. crystallising £500,000 of £1.25m is only 40% of that individual’s LTA, whereas £500,000 of £1m uses 50% of the reduced LTA from 06/04/2016) – see our Technical View Special Feature Part 1.

Scenario 2

Client has over £1m in total pension savings and doesn’t wish to continue accrual.  In this case it may be appropriate to apply for FP16 as this will protect his current value (up to a maximum of £1.25m).  Note that FP16 would be lost if further pension savings were to be made on or after 06/04/2016.  If the client wanted to continue making pension savings, they could apply for IP16, which would protect the capital value of their benefits as at 05/04/2016 – their ‘protected amount’.  They can still then make pension savings but anything crystallised over and above the ‘protected amount’ is subject to the LTA charge.  If the value of the client’s pension savings were £1.25m or above on 05/04/2014, they may still be able to apply for IP14 up until 05/04/2017 – see HMRC online guidance. 

Scenario 3

Client’s pension savings are over the £1m LTA, but has already crystallised benefits and/or is over age 75.  In this case, it is very unlikely that their benefits will be tested against the LTA in future and therefore protection may not be necessary (in some circumstances there is a potential for a BCE 3 post age 75, see relevant HMRC guidance for more details on this).

Scenario 4

If the client does not wish to make significant contributions, they may be able to flexibly access their fund pre 06/04/2016 and have part, or the entire fund tested against the current LTA of £1.25m (as per scenario 1).  Note that flexibly accessing their pension savings will be a trigger event and they will be subject to the Money Purchase Annual Allowance (MPAA) of £10,000.  One option may be to take PCLS only and leave the drawdown pension fund untouched.   This is not a trigger event and so the client will still be subject to the normal annual allowance.  Note that for high earners, if they are caught by the tapered annual allowance they may have their annual allowance significantly reduced anyway.  The only difference then may be that with the MPAA, they have no ability to use carry forward. 

Scenario 5

If your client’s pension savings are over the LTA of £1m, or if they (or their employer) intend to make further contributions, it may be worth them applying for IP16 which will protect the value of their pension savings as at 05/04/2016.  This will allow them to keep making pension savings, but as per scenario 2, anything over their protected amount will be subject to the LTA charge.  If they are able to keep maximising contributions (bearing in mind the tapered annual allowance for high earners), the tax relief they receive on these contributions (or the benefit of having employer contributions) may be worth the sting of an LTA charge.

Date issued: 31.03.16

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 March 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.

Past performance is no guarantee to future performance. The value of investments can fall as well as rise so investors could get back less than they invest.

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.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.