Synopsis: Detailed provision for Fixed & Individual Protection published.
In line with the publication of the draft clauses of the Finance Bill 2016 the government has published detailed provision on the reduction of the Lifetime Allowance and the 2 new layers of transitional protection.
The reduction in the lifetime allowance affects those who could have pension wealth between the new and the old lifetime allowances when they retire. Around 55,000 individuals are expected to have pension assets that are worth between £1 million and £1.25 million in 2016 to 2017.
But what if you have reasonable sized pensions but plan to leave then untouched for as long as you can due to the attractive death benefits now attached. Compound your current pension value by a reasonable level of growth between now and age 75 and see what your pension value would be. It may well breach the new Lifetime allowance and if so serious thought should be given to Fixed Protection 16.
The paper confirms that Fixed Protection 16 and Individual Protection 16 will work in a similar way to the two previous transitional protection regimes, FP14 and IP14. Individuals have to obtain a reference number from HM Revenue and Customs (HMRC) if they want to rely on FP16 or IP16, before they take their benefits. Individuals with FP16 will have a personal lifetime allowance equal to the greater of £1.25 million and the standard lifetime allowance. Individuals with IP16 will have a protected LTA of the value of their pension savings on 5 April 2016 subject to an overall limit of £1.25 million.
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 a defined benefits scheme 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 for the revaluation of accrued rights, or CPI (if no rate is specified), although certain statutory increases will be excluded from the test
Individuals with IP16 will be able to carry on actively saving in a registered pension scheme, should they so wish, but would be subject to the LTA charge on any excess savings over their personal LTA when they take their benefits.
Relieved members of relieved non-UK pension schemes will also be able to apply for FP16 subject to their not having a pension input amount of greater than nil in the non-UK pension scheme in any tax year from 2016 to 2017.
An amendment will be made to ensure that, where an individual dies before 6 April 2016, but a relevant lump sum death benefit is paid on or after 6 April 2016, the relevant lump sum death benefit will be tested against the standard lifetime allowance at the time of the individual’s death.
Individuals will be able to apply for both FP16 and IP16. Where an individual holds FP16 and IP16, FP16 will take precedence, but should this be lost the individual will revert to IP16.
Changes are also being made to FA 2004 to ensure that individuals who have primary or enhanced protection, with no lump sum protection, receive the pension commencement lump sum intended by the legislation
The transitional arrangements for electing FP16 or IP16 are still outstanding. The online system for elections is not expected until July 2016. Professional advice in this area cannot be underestimated. Feel free to call one of our advisers for help and advice.
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