The Lifetime Allowance (“LTA”) covers any pension benefits you may have in all UK tax-registered pension arrangements including personal pensions, stakeholder pensions, workplace pensions, final salary pensions, death in service benefits and pensions already in payment. If the value of your pension benefits when you draw them is more than the LTA, you will have to pay tax on the excess benefits.
From 6 April, the LTA is changing.
How is the LTA changing?
From 6 April 2014 the LTA is reducing from £1.5 million to £1.25 million. Any excess above the allowance will be taxed at 55% if taken as a lump sum or 25% (plus income tax) if taken as an income.
What could this mean for you?
Around 30,000 individuals are expected to have pension assets that are worth between £1.25 million and £1.5 million in 2014-15. In future years, this reduction in the LTA could potentially affect a further 330,000 individuals who will have pension wealth between the new and the old LTA when they retire.
For an individual with £1.5 million saved into pensions, the changes in LTA could cost up to £137,500 if the £250,000 excess was taken as a lump sum.
Many pension schemes include a lump sum death benefit rather than a dependant’s pension. The payment of a lump sum death benefit will trigger the test of an individual’s pension benefits against the LTA effective at the date of the individual’s death. This means that beneficiaries can face an unexpected tax charge of 55% on the excess over the LTA. An individual with a current salary of £125,000 and a death-in-service lump sum of four times salary could easily find that the total value of accrued pension funds may, in the event of death, cause a tax charge at a difficult time.
What you can do to protect your pension?
The LTA charge can be averted by providing lump sum death benefits through a trust outside of the tax-registered framework. Relevant Life Policies can provide this remedy to individuals and Excepted Group Life Schemes can provide a similar remedy for groups of employees.
Relevant Life Policies can only be created by employers for their employees, including directors of the company. The employer can be a limited company, partnership, LLP or a sole trader; however partners, LLP members and sole traders are not employees. The main benefit is a lump sum payable on death before the age of 75. The benefit will be paid by the insurer to the trustees of the trust, usually including the employer as a trustee, and the trustees would usually have discretion as to who should receive the benefit from the classes of beneficiaries specified in the trust.
Excepted Group Life Schemes enable employers to provide lump sum benefits to their employees which are normally based on the employee’s earnings and do not count towards the LTA. An employee of a company, or an employee or equity partner of a partnership or LLP, may be eligible to become a member of an Excepted Scheme. The benefit will be calculated and payable in the same way and in the same circumstances for each person covered by the scheme.
For further information on these non-registered options and advice on how to protect your pension, please contact Nigel Bolton, Pensions Partner at Irwin Mitchell LLP on 0113 220 6213 or at Nigel.Bolton@irwinmitchell.com.