REDUCTION IN THE PENSION LIFETIME ALLOWANCE

The Budget confirms that the pension lifetime allowance will reduce from £1.25 million to £1 million from 6 April 2016.

Individuals who are likely to be affected by the reduction in the pension lifetime allowance from 2016/17 will need to consider what action they should take. This will include people who have not yet drawn benefits from their pension pots where those pots are likely to have a value of between £1 million and £1.25 million on retirement.

This could, of course, extend to people who have pension funds some way short of £1 million but who have some years to retirement over which reasonable investment growth could be expected.

APPOPRIATE PENSION PLANNING MAY INCLUDE:

People who are likely to have pension with a value of between £1 million and £1.25 million they can consider making an election to protect that value.

The options here are for an election for Fixed or Individual Protection. This should include individuals aged under 75 in receipt of drawdown benefits, if they feel a future benefit crystallisation test at age 75 may result in them exceeding the reduced £1 million lifetime allowance.

An election for Fixed Protection protects a pension lifetime allowance of £1.25 million. If an election for Fixed Protection is made, personal contributions must cease and accrual to defined benefit schemes will be severely restricted after 6 April 2016.

Any individuals looking to make such an election will therefore need to ensure that contributions/benefit accrual occurring before then are appropriately maximised.

HMRC are planning to introduce more flexibility over the time that such an election can be made although additional pension accrual/conditions will need to cease on 5 April 2016.

On the other hand, for a person who has a pension plan with a current value of between £1 million and £1.25 million, an election for Individual Protection may be appropriate. This protects the certified sum but further contributions can be made which would be useful, for example, if fund values reduce.

People considering how best to minimise the value of benefits being tested against the lifetime allowance could consider other strategies.

For instance, someone aged 55 or over looking to crystallise benefits in the next few years could consider drawing some or all of their benefits in 2015/16 when these will be set against the current £1.25 million lifetime allowance.

In such circumstances, if an individual crystallised benefits with a value of £500,000 in 2015/16 this would only use up 40% of his lifetime allowance whereas if he left this until 2016/17 it would use up 50% of his allowance.

People considering how best to take benefits should consider their options. For example, if a member had money purchase benefits, using his fund to purchase a scheme pension rather than a lifetime annuity may reduce the percentage of the lifetime allowance he has used up.

A member of a DB scheme should consider the difference in the lifetime allowance assessed where he draws his benefits solely as a pension or as a tax free cash sum with a reduced pension. In 2015/16 this would only use up 40% of his lifetime allowance whereas if he left this until 2016/17 it would use up 50% of his allowance.

People considering how best to take benefits should consider their options. For example, if a member had money purchase benefits, using his fund to purchase a scheme pension rather than a lifetime annuity may reduce the percentage of the lifetime allowance he has used up. A member of a DB scheme should consider the difference in the lifetime allowance assessed where he draws his benefits solely as a pension or as a tax free cash sum with a reduced pension.

Are you looking for pension advice in East Sussex, Eastbourne, Uckfield, Lewes, Crowborough, Hastings, Seaford or Newhaven? Clifford Osborne are IFA’s offering pension advice including pension freedom, pension income options, pension drawdown and more. You can also read our other informative blogs about pensions.