Lifetime allowances

As well as putting a cap on your contributions the Government has put a limit on the amount that you can have invested in a pension plan at the time that you take the benefits. They called the permitted amount the Lifetime Allowance.

This limits have been set for the next 3 years and they are:

2008/09    £1,650,000
2009/10    £1,750,000
2010/11    £1,800,000

If the value of your funds exceed these limits when benefits are taken then substantial tax charges will apply to the excess. This is 55% if the excess benefits are taken as a lump sum or 25% if taken as income. The income will then be subject to income tax at the member’s highest rate.

It had been expected that the Lifetime Allowance limits would continue to rise as above, however in the Pre-Budget Report 2008 the Chancellor announced that the Lifetime Allowance limit would be frozen at the 2010/11 levels for five years until 2015/16.

Protection for Lifetime Allowance

Any pension fund that exceeds the relevant Lifetime Allowance at the time that benefits are taken (known as Crystallisation) will be subject to the Lifetime Allowance charge.  However, if the plan existed at “A Day” (the 6th April 2006) it is possible to protect these plans by registering for either Primary or Enhanced Protection with the Inland Revenue.

The announcement to freeze the Lifetime Allowance makes it even more important to register for the transitional protection.  The deadline for registering is 5th April 2009.

Anyone who has a pension fund above £1.25m today who achieves reasonable fund growth of 6.5% will face a 55% tax charge on some of their fund by 2015 if they do not register for Protection.  There are two types of protection available:

Primary Protection - Provided the benefits were within Inland Revenue limits at “A-Day” these benefits can be registered to protect them from any charge. The Protection will entitle such individuals to a Lifetime Allowance that is enhanced by the percentage by which the fund currently exceeds the allowance. Benefits can continue to accrue but if these and/or any investment growth take the fund value over the elevated allowance, the Lifetime Allowance charge will apply.

Enhanced Protection - This allows any level of fund to be protected as long as it complied with Inland Revenue limits before “A-Day”. There is no limit on the investment growth that can be added to the plan, but all contributions must have ceased on “A-Day”.

Protection of Tax-Free Cash

For plans that are based on Occupational Scheme rules it is possible that the tax-free cash is above the normal amount, which is 25% of the value of the plan. This is again related to values at 6th April 06 (A Day) and if higher tax-free cash applied at that time it is possible to protect this so that the higher amount can be taken in the future.

Complicated?  Yes. If in doubt contact us to ascertain your position.