Pension savings currently attract tax relief. The Lifetime Allowance (LTA) is a limit placed by the Government on the value of pension benefits an individual can accrue over their lifetime without paying tax charges.
It was introduced from 6 April 2006 when the limit was set at £1.5m and gradually increased, hoping to keep pace with inflation. However, successive budgets have reduced the LTA to its present level of £1.25m.
The Treasury estimated 120,000 individuals would have pension savings above £1.25m in April 2014. People with high earnings and long pensionable service could be affected by the reduced LTA, e.g. a headteacher with a pensionable salary of £100,000 pa, or someone earning less who has paid significant additional contributions over their working life.
Various protections on pension savings above the LTA were available in the past, most with restrictions on further pension savings. In April 2006, HMRC had introduced two transitional protections – primary and enhanced protection – for those who had pension savings close to the £1.5m LTA at 6 April 2006. With the reductions in the LTA from 6 April 2012 and 6 April 2014, the Government offered further forms of protection. While applications for most of these have now ceased, there is still one more option available.
Individual Protection 2014
Individual Protection 2014 (IP14) is available to individuals who have at least £1.25m of pension savings as at 5 April 2014 and do not have primary protection. IP14 gives a personalised LTA equal to the value of an individual’s pension savings on 5 April 2014, up to a maximum of £1.5m.
Another feature of note is that IP14 is not lost and will remain in place if further pension contributions are paid or further pension is accrued. Any pension savings greater than the protected LTA will be subject to LTA tax charges. Applications for IP14 must be received by HMRC no later than 5 April 2017. For individuals with enhanced protection or either form of fixed protection, IP14 can offer a safety net where the earlier LTA protections could inadvertently be lost. It is also worth noting that IP14 will remain dormant unless the earlier protection is lost.
The LTA and protection issues are complex and there could be severe tax implications associated with getting it wrong. For those with pension savings of more than £1.25m as at 5 April 2014, IP14 should be considered and expert advice sought.
Assistance can also be given to employers who wish to provide their senior staff with help and guidance about these changes – see our educational service.
For more information or to discuss the issues raised in this blog, please contact Bhargaw Buddhdev or Lisa Lawson on 01494 788100 or ExecutivePensions@Barnett-Waddingham.co.uk.