First introduced on 6th April 2006, the Lifetime Allowance (LTA) is the maximum amount of pension saving you can have without incurring a tax charge. Originally fixed at £1.5m, the protection ring-fenced an amount of your pension from the tax man, but also gave the government a way of clawing back some of the tax relief which those who have built up large pension pots would have received whilst accruing their pension benefits.
When the LTA was introduced on 6th April, there were two kinds of protection available; primary protection and enhanced protection, and both required you to apply to HMRC before 6th April 2009.
Primary protection was available if you had pension savings in excess of the then standard LTA of £1.5m, on 5 April 2006. Enhanced protection was available to anyone regardless of the value of their 5 April 2006 accrued benefits, provided your benefits did not increase by more that a set annual rate between 6 April 2006 and your retirement date. The growth of your benefits was subject to an economic growth index-linked annual test. However, enhanced protection could be lost, if other than simply transferring existing benefits you built up new benefits in any scheme, above the annual tested rate.
Fixed Protection came into being on 6 April 2012, when the standard LTA was fixed at £1.5m, having grown annually since April 2006. Fixed rate protection recognised that you expected to have pension savings of more than the standard LTA of £1.5m after 5 April 2012, up to £1.8m and again, you needed to have already applied to HMRC for it. If you already held enhanced protection, you lost this, if you applied for fixed protection. The fixed protection was again subject to annual ‘benefit accrual’ testing.
The advent of automatic enrolment into a workplace pension scheme is broadly seen as a good thing for our ability to live in later life, but individuals with enhanced or fixed LTA protection may need to assess their position, in light of the scheme.
Anyone with enhanced or fixed protection who is automatically enrolled by their employer will lose their protection status unless they opt out. You need to be aware that an employer may not know if you have enhanced or fixed protection, especially if you acquired pension savings in previous employments or privately.
Complicating matters further, the Government is introducing a new LTA ‘Fixed Protection 2014’ arrangement, lowering the threshold of the lifetime allowance from 6 April 2014, to £1.25 million. This could all change again in the Autumn Statement. If you feel that you are likely to be affected by the new cap, now is the time to seek information and advice. Please call 01509 410364 and ask to speak to Matthew Walne.