Pension Lifetime Allowance Decrease

Newsletter issue - December 2011.

There is another change due in April 2012 that will affect tax relief for pension contributions. The Lifetime Allowance, which is the maximum tax favoured fund you can have in a pension scheme, will reduce from Â£1.8 million to Â£1.5 million from 6 April 2012.

The maximum fund of Â£1.8 million will produce an index linked pension of around Â£75,000 p.a. for a man retiring at 65, using current annuity rates. So the new cap of Â£1.5 million is not particularly helpful. If you already have pension funds, which in total are worth more than Â£1.5 million, you may need to apply to HMRC to ring-fence your existing pension savings for tax purposes, under what is called 'fixed protection'.

To work out whether fixed protection is required, you must add together the values of all your various pension funds. Most people will have accumulated funds in a number of schemes over their working life as they change jobs, or start contributing to new pension schemes for other reasons. If you are in this position, you will need to request a 'Lifetime Allowance Factor' (valuation of the fund), from all the companies with which you hold a pension scheme. Such requests normally take around eight weeks to process, so you need to get a move on.

The application for fixed protection must reach HMRC by 5 April 2012, and it must be made on the prescribed form. Late applications will not be accepted. Where fixed protection is granted you will not be able to make any further tax-allowable pension contributions to a registered pension scheme, or build-up further benefits in a defined benefits scheme. So if you are considering applying for fixed protection for your pension funds, you should first take expert pensions advice.