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Lifetime Allowance

Pension Lifetime Allowance 2014/15 – Act now to avoid accidentally paying 55% tax


From 6 April 2014 the pension lifetime allowance will reduce from £1.5 million to £1.25 million. Whilst the figure of £1.25 million sounds like a lot (because it is), there are likely to be a number of higher earning individuals who will now be affected by this but haven’t realised it yet.

The reason for this is that the allowance covers all your pension savings as well as pension benefits you have taken already, it also covers the capital value of any final salary pension schemes.


Mary, a hospital doctor on the NHS final salary scheme is approaching retirement, and is anticipating a pension of £50,000 from the NHS scheme. She also has a top up pension fund of £150,000.

When she retires the capital value of her benefits will be calculated as follows:


NHS pension: (£50,000 x 20):  £1,000,000

Plus NHS lump sum:  £150,000

Personal Pension Fund: £150,000

Total capital value: £1,300,000


And the excess tax charge will be:

Value in excess of allowance:  £50,000

Initial excess tax charge (25%):  £12,500

Income tax on remaining excess (30%)*:   £15,000

Total tax bill (55%): £27,500

(* This assumes that excess benefits are taken as income and that she is a 40% taxpayer at the time benefits are taken).

Whilst this is a fictional example, it is not unlike the situation of many doctors and dentists in the NHS who are approaching retirement.


Will you be affected?

To answer this a good place to the HMRC online Lifetime Allowance Checking Tool.


What are your options?

If you think that you are likely to be affected then there are a number of options for you to consider:

1.  Do nothing – this is likely to be the default option for those who have a long time to go before retirement and whose benefits are currently nowhere near the limit and/or those who wish to keep making contributions to their pension;

2. Take your benefits now (before 6 April) – This may be available if you are over 55 and if your pension scheme(s) permit and will entitle you to use the £1.5 million lifetime allowance.  However it will in most cases mean ceasing or dramatically reducing the work you do for your current employer;

Alternatively, you may be able to apply for one or two forms of lifetime allowance protection, which come into force with the changes (see: HMRC explanation of these):

3.  Opt for Fixed Protection 2014 – In summary this has the following features:

  • You can apply to HMRC to fix your lifetime allowance at £1.50 million, (of the two forms of protection this is likely to offer the highest benefits);
  • This must be done by 5 April 2014.  The easiest way to do so is by using HMRC’s online form;
  • The rub is that once you apply you/your employer will not be able to make any further contributions to any pension and you will not be able to join a new pension except for the purposes of transferring existing benefits – if any contributions are made by you or your employers then this protection will automatically cease.  This is a potential risk since under the new auto-enrolment legislation all employers must enrol you automatically in a pension scheme unless you specifically opt out;
  • If your benefits are between £1.25m and £1.50m you will not be charged an excess tax charge but if they are above £1.50m you would be charged on the excess benefits when these come to be taken;
  • If the lifetime allowance increases in the future and is above £1.50m you can cancel the Fixed Protection.

4.  Opt for Personal Protection – In summary this has the following features:

  • You can apply to HMRC to fix your lifetime allowance at the level of your own benefits as at 5 April 2014, provided that these are more than £1.25 million on that date;
  • As the level of benefits must be calculated as at 5 April 2014, Personal Protection cannot be applied for until after that date (the legislation is not likely to gain Royal assent until the summer, so it may be that you will not be able to apply until then);
  • Further contributions may be made to your pension after 5 April but if you breach your personal protection limit there will be an excess charge;
  • The fact that further contributions are allowed means that it may be appropriate to apply for this just in case further contributions are made to your pension (i.e. in error) after 5 April 2014;
  • If you do not intend to make future contributions then you can apply for both Fixed Protection and Personal Protection (this can act as a safeguard against auto-enrolment cancelling your Fixed Protection).


So which of the options is best for you?

Like most pension legislation this is somewhat complicated and the best solution for you will be determined by your own circumstances and goals so we encourage anyone affected to seek independent advice.


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