A-Day new pension tax regime

The importance of good advice

These changes make receiving professional pensions advice more important than ever. That's because the new rules will benefit many, but could be disadvantageous to some.

Initially, it will be £1.5 million. This is the maximum pension benefit value from all pension arrangements that can be built up under the tax-approved umbrella for an individual.

For a defined benefit scheme, each £1 p.a. of pension is valued as £20 against the Lifetime Allowance. As such, there will effectively be a defined benefit pension allowance of 1/20th of the Lifetime Allowance, i.e. £75,000 p.a. initially – actually greater than the current earnings cap limit! There is further good news, in that there is provision for a member of a money purchase scheme buying an annuity to effectively choose between the better of the £1.5 million fund allowance and £75,000 p.a. pension allowance. Where there is a combination of different types of benefit, they will be aggregated against the Lifetime Allowance.

A Lifetime Allowance tax charge of 55 per cent of the value of benefits in excess of the Lifetime Allowance will be levied on the fund, with the net amount then payable as a lump sum. Alternatively, a 25 per cent charge can be paid, with the excess benefits payable as pension subject to income tax at the marginal rate. The Lifetime Allowance is only tested at the time or times when benefits are taken.

Each time pension benefits are taken, the percentage of the Lifetime Allowance that they represent will be recorded by the pension administrator for those benefits and notified to the individual. It will be the individual's responsibility to disclose to the pension administrator, when a benefit is taken, whether the benefits being drawn will take them over their Lifetime Allowance.

These benefits can be protected from the 55 per cent tax charge. There are two alternatives available to choose from:

Primary protection
This applies where benefits at A-Day valued above £1.5 million can be certified to create that individual's own personal uplifted Lifetime Allowance. This personal Lifetime Allowance will then be increased at the same rate as increases in the standard Lifetime Allowance. When benefits are taken, they will be checked against the personal Lifetime Allowance, and only benefits above this uplifted allowance will be subject to the 55 per cent tax charge.

Therefore, with money purchase benefits in particular, strong growth in the value of the primary protected benefits after A-Day will result in a 55 per cent tax charge on the growth in excess of the Lifetime Allowance indexation.

Future pension contributions or pension accrual are permitted after A-Day under primary protection. However, unless the benefits already built up at A-Day fail to keep pace with the Lifetime Allowance indexation, these benefits earned after A-Day will be subject to the 55 per cent tax charge.

Enhanced protection
Benefits at A-Day protected under enhanced protection will avoid the 55 per cent tax charge irrespective of their final value when they are taken, i.e. allowing for salary and/or investment growth on benefits. (Defined benefits subject to the earnings cap at A-Day will have subsequent pensionable earnings capped at 7.5 per cent of the Lifetime Allowance.) There can, though, be no further pension contributions after A-Day under enhanced protection. The defined benefits that can be paid under enhanced protection are based on those accrued at A-Day. However, there is scope for further accrual if benefits are taken early – this results in a delicate balancing act, which will need very careful planning.

There are also provisions, under both types of protection, to restrict benefits protected at A-Day to 20 times the HM Revenue & Customs maximum pension under the current regime. To be able to obtain enhanced protection, benefits above this limit would need to be 'surrendered'.

Which type of protection could be appropriate?

Just which protection option should be chosen will depend very much on each individual's circumstances:

With money purchase benefits above £1.5 million, enhanced protection may be the right option. With defined benefits above £1.5 million, the appropriate protection will be influenced by a number of factors, including when the individual is planning to retire, expected benefit growth and the non-pension benefit alternatives offered by the employer (where relevant). With benefits approaching £1.5 million, the individual will need to consider when they plan to retire and their expectations for future benefit growth (salary and/or investment), alongside any alternative non-pension benefits offered, in deciding whether to claim enhanced protection.

If you require any further information about the services that we provide or would like to review your financial planning position, please contact us

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