Individuals who are, or are likely to be, affected by the reduction in the lifetime allowance from £1.25 million to £1 million which applied from 6 April 2016 will need to consider what action they should take.
Action may still be possible to preserve a higher entitlement for those people who have not paid any further contributions since 5 April 2016 – Fixed Protection 2016 – or for those who have paid, or plan to pay contributions, after 5 April 2016 – Individual Protection 2016. However, those applying for Individual Protection 2016 need to have had pension benefits worth at least £1 million as at 5 April 2016.
Whilst there isn’t a deadline, apart from the requirement to make an application before drawing pension benefits, as schemes only have a statutory duty to provide 5 April 2016 values up to 5 April 2020 this may result in an effective deadline to apply for Individual Protection 2016 for many individuals.
The lifetime allowance will increase in line with CPI to £1,055,000 for 2019/2020. So, there is no longer any value in applying for Individual Protection 2016 for individuals whose fund value was greater than £1 million but less than £1.055 million.
Although the increase in the lifetime allowance is relatively small it could be taken as an indication that the Government doesn’t intend to reduce it any further and that they will continue to uplift it in line with inflation. However, people who have pension benefits some way short of £1.055 million, but who have some years to retirement over which reasonable investment growth, could still be caught by a lifetime allowance charge.
A lifetime allowance charge could also apply to those with pensions that commenced pre-6 April 2006, who have since that date taken out further pension arrangements that have yet to be tested against the lifetime allowance.
Some individuals may be better off waiting until after 5 April 2019 to vest their pension benefits. It’s important to consider where the pension fund is likely to be at the point of crystallising (or other BCE event).
Where people feel that they do not want to make further provision via a registered pension scheme because of the imposition of the lifetime allowance, but still need to save for retirement, they could consider using tax-efficient investments outside of a pension wrapper. Savings such as ISAs, collectives and investment bonds should all be considered.