Pensions: Reduction of the lifetime allowance

Transcription

1 Pensions: Reduction of the lifetime allowance Draft Guidance 9 December 2010 This guidance is based on draft legislation which may be amended as it goes through the Parliamentary process. The guidance therefore is also draft. 1

2 Contents Page Introduction 3 Chapter 1 Lifetime allowance what is changing? 4 Chapter 2 Guide to changes in the lifetime allowance 5 Chapter 3 Impact of a reduced lifetime allowance on 13 pension savings Chapter 4 Fixed protection for pension savings 18 Chapter 5 Lifetime allowance existing forms of 26 protection Chapter 6 Further information 32 2

3 Introduction This draft guidance contains information on changes in respect of the lifetime allowance based on the draft legislation published on 9 December It is subject to change depending on the final legislation. A navigable version of this guidance will be published shortly on the HM Revenue & Customs (HMRC) website. HMRC will update the navigable version as further decisions are made. The draft guidance has been written for individuals and pension scheme members so that they can understand the changes to the lifetime allowance and the effect that it might have on them. Where the draft guidance refers to 'you' it should be read as meaning the individual scheme member. 3

4 Chapter 1 Lifetime allowance what is changing? Draft guidance based on the draft legislation published on 9 December 2010 Lifetime allowance The lifetime allowance is the maximum amount of pension and/or lump sum that you can get from your pension schemes that benefit from tax relief. The current lifetime allowance is 1.8 million. There is no limit on the amount of benefits that your pension scheme can pay you. However if your pension scheme gives you benefits that total more than your lifetime allowance you ll pay a tax charge on the difference between your lifetime allowance and your pension benefits. For example if your pension benefits total 2 million you ll pay tax on 0.2 million the difference between the current lifetime allowance and your pension benefits. This tax charge is called the lifetime allowance charge. This charge recovers tax relief that you got when your pension savings were being built up. Main changes at a glance From 6 April 2012, the lifetime allowance will be reduced to 1.5 million from the current level of 1.8 million. There will be a new form of protection called fixed protection. This protection will be available to people who expect the amount of their pension savings to be more than 1.5 million when they come to take their benefits. Anyone with existing primary or enhanced protection will continue to be unaffected by the reduction in the lifetime allowance. If you take a lump sum instead of a small pension this is known as trivial commutation. The maximum amount of pension savings that can be commuted on grounds of triviality will no longer be linked to the lifetime allowance it will be fixed at its current level of 18,000. When will this be introduced? The reduced lifetime allowance will apply from 6 April Transitional rules If you want to apply for fixed protection following the reduction in the lifetime allowance you will have to make an application to HM Revenue & Customs (HMRC) before 6 April Annual allowance Changes to the annual allowance are being made from 6 April Draft guidance on these changes has already been published on the HMRC web site at 4

5 Chapter 2 Guide to changes in the lifetime allowance Draft guidance based on the draft legislation published on 9 December 2010 What is the lifetime allowance? The lifetime allowance is the maximum amount of pension and/or lump sum that you can get from your pension schemes that benefit from tax relief. There is no limit on the amount of benefits that your pension scheme can pay you. However, if your pension scheme gives you benefits of more than your lifetime allowance you will pay an extra tax charge on the amount over your lifetime allowance. This tax charge is called the lifetime allowance charge. How does the lifetime allowance affect my benefits? The lifetime allowance does not affect the amount of benefits provided by your pension scheme. But as it can affect the amount of tax that you pay, your take home benefits will be less if you have to pay the lifetime allowance tax charge. How much is the lifetime allowance? The amount of the lifetime allowance for and is 1.8 million. The amount of the lifetime allowance for will be 1.5 million. Despite this reduction, most people will not be affected by the lifetime allowance charge as they do not have pension savings of more than 1.5 million. How will I know if I am affected by this change? Most people will not be affected because their benefits will be less than the lifetime allowance. To receive benefits of more than the lifetime allowance you would need to have saved more than 1.5 million in money purchase pension schemes or, if you are a member of a final salary scheme you would need to be entitled to a pension of either 75,000 pa or, if your scheme gives you a separate lump sum (typically 3 times your annual pension), a pension of around 65,000 pa. However, if your benefits are more than the lifetime allowance then a tax charge will apply. This is called the lifetime allowance charge. 5

6 Example 1 Xavier is a member of a final salary pension scheme. At 5 April 2012 Xavier is 55 and has built up a pension of 50,000. Xavier plans to retire at age 60. Based on his current level of pensionable pay, Xavier will have built up a pension of 60,000 when he plans to retire. To see if his benefits will be more than the lifetime allowance, Xavier will need to multiply his pension entitlement by a factor of 20 to get a capital value to compare to the lifetime allowance. On 5 April 2012, Xavier s benefits are valued as 50,000 x 20 = 1 million. At Xavier s planned retirement date his benefits would be worth 60,000 x 20 = 1.2 million. So his benefits at retirement will be less than the reduced lifetime allowance of 1.5 million. Example 2 Samina is a member of a pension scheme which gives her a pension of 1/80 th of final salary for each year of service and a separate lump sum of 3/80 th of final salary for each year of service. At 5 April 2012 Samina has built up a pension of 60,000 and a separate lump sum of 180,000. On this day Samina leaves the scheme but does not take her benefits. Samina plans to take her benefits on her 60 th birthday 8 April Under the scheme rules Samina s deferred benefits are increased by 3% a year during the period of deferral. Samina knows that when she plans to take her benefits they will be a pension of 63,564 and a lump sum of 190,962. The value of Samina s benefits when she retires on 8 April 2014 for lifetime allowance purposes is 63,654 x ,962 = 1,462,242 Samina s benefits are less than the reduced lifetime allowance of 1.5 million. Example 3 On 1 June 2011 Andy has 1,000,000 in a self invested personal pension fund (SIPP) to which he is contributing 20,000 per annum. He is not a member of any other pension scheme. Andy wants to take his benefits in three years time in June 2014 and wants to work out if he needs to apply for the new fixed protection. He knows that if he makes any further contributions after applying for protection he will lose this so he assumes that he will make no further contributions and that until he takes his benefits, any future growth in his fund will be purely investment growth. To be more than the lifetime allowance Andy s pension fund would have to increase by more than 500,000 in value in three years. Andy decides this is unlikely to happen so he does not apply for fixed protection. He continues his contributions. 6

7 When will my pension savings be tested against the lifetime allowance? At certain times the value of your benefits will be tested to see if they are more than your lifetime allowance. The time at which the value of your benefits is tested against the lifetime allowance is called a benefit crystallisation event (BCE). For most people their BCE(s) will occur when they start to take benefits. For example, this can happen when your pension comes into payment, when you use your pension savings to buy an annuity or when you start drawing down income from your pension fund. The circumstances in which a BCE occurs and how benefits are valued at a BCE have not changed. If you want to find out more about BCEs see the section of Registered Pension Schemes Manual (RPSM) starting at RPSM What happens when a BCE occurs? When a BCE occurs your scheme administrator must be satisfied that there is no lifetime allowance charge. If the value of pension savings in your pension scheme is above the lifetime allowance, your pension scheme will normally deduct the tax due and pay this to HMRC. If they do not do this they may have to pay extra tax and penalties to HMRC. There is no set way in which your pension scheme carries out this lifetime allowance test. Your scheme administrator may ask you for full details of any benefits you have previously taken from the scheme or from any other pension scheme. Or they may simply ask you to confirm that your total benefits will not be more than the normal lifetime allowance. If you do not give your scheme administrator the information they need to carry out this lifetime allowance test your scheme could choose to delay paying your benefits. After a BCE your scheme administrator will tell you what percentage of the lifetime allowance the BCE has used up. If your scheme is paying you a pension it will give you this information again at least once a tax year. Many schemes choose to add this information to the P60 they send you after the end of each tax year telling you how much income tax has been deducted from your pension. This information should be given to everyone who has had a BCE even if they do not have to pay the lifetime allowance charge. What happens if I am paid more than one pension? When you start your first pension your scheme administrator will work out the value of your benefit crystallisation event (BCE). This is the amount of the lifetime allowance you have used up. Your scheme administrator will then convert this amount into a percentage of the lifetime allowance. If you have used up more than 100% of the lifetime allowance: there will be a lifetime allowance charge on the amount of your benefits that is more than the lifetime allowance; your scheme administrator will tell you how much of the lifetime allowance you have used up and how much your tax charge is; and there will be a lifetime allowance charge on any other pensions coming into payment in the future. 7

8 If you have not used up more than 100% of the lifetime allowance you will not have a lifetime allowance charge; and your scheme administrator will tell you how much of the lifetime allowance you have used up. When you start your first pension your scheme administrator will work out the value of the benefit for lifetime allowance purposes. This is the amount of the lifetime allowance you have used up. Your scheme administrator will then convert this amount into a percentage of the lifetime allowance. When your next pension comes into payment the scheme administrator will work out the value of your BCE. Again this will be converted into a percentage of the lifetime allowance. The value of all your BCEs will be added together. If you have used up more than 100% of the lifetime allowance you will be liable to the lifetime allowance charge on the amount over the lifetime allowance. This process is repeated every time you start to take benefits and have a BCE. Example Alan is a member of two pension schemes. Alan takes benefits from scheme A on 8 April He takes benefits from scheme B on 1 November Alan takes a lump sum and pension from both schemes. Alan has not previously used up any of the lifetime allowance. He tells the scheme administrator he has 100% of the standard lifetime allowance available. The scheme administrator calculates the value of the benefits to be paid on 8 April 2012 as 1.2 million. This is 80% of the standard lifetime allowance of 1.5 million for the tax year. As Alan has only used up 80% of his lifetime allowance there is no lifetime allowance charge. The scheme administrator gives Alan a certificate telling him that he has used up 80% of the standard lifetime allowance. On 1 November 2012 Alan becomes entitled to benefits under scheme B. The scheme administrator of scheme B values the benefits as 450,000 for lifetime allowance purposes. This is 30% of the 1.5 million standard lifetime allowance. Alan tells scheme administrator B that he has already used up 80 % of the standard lifetime allowance. Scheme administrator B now knows that Alan only has 20% of the standard lifetime allowance available. The benefits from scheme B are worth 30% of the current standard lifetime allowance. Scheme administrator B works out that 150,000 of Alan s benefits are subject to a lifetime allowance charge. Alan chooses to take the 150,000 liable to the lifetime allowance charge as a lump sum. This would be subject to a lifetime allowance charge of 55%. The scheme administrator deducts the 55% from the 150,000 lump sum and pays Alan the remaining 67,500. Scheme administrator B pays HMRC the lifetime allowance charge. Scheme administrator B also tells Alan: how much of the lifetime allowance has been used up by the scheme B benefits, 8

9 how much the lifetime allowance charge is, how they calculated this amount, and that they have paid this tax to HMRC. Alan can use this information to complete his Self Assessment tax return. Will there be protection for existing pension savings when the lifetime allowance reduces? Yes - you can apply for protection from the effects of the reduction in the lifetime allowance if you believe it will affect you. This fixed protection will protect pension savings up to 1.8 million from the lifetime allowance charge. However, to keep this protection you have to meet certain conditions. These include No new contributions can be paid to a money purchase arrangement. The amount of benefits you can build up each year under a defined benefits arrangement or a cash balance arrangement will be limited. You will not be able to open a new pension arrangement under a registered pension scheme, unless it is only to receive a transfer of rights from an existing pension arrangement. You will not be entitled to fixed protection if you have enhanced or primary protection. How will I know if my pension savings will be more than 1.5 million? To decide if your pension savings are above or below the lifetime allowance, you need to work out the value of your pension savings for all the pension arrangements under all the registered pension schemes that you belong to, and add these together. How you value your pension saving depends on if your pension is already in payment, and for benefits not yet in payment, the type of pension arrangement that you belong to. The type of arrangement you belong to depends on the type of benefit you have been promised. You can be in more than one type of arrangement under the same pension scheme. Pensions in payment If your pension started to come into payment after 5 April 2006 then a benefit crystallisation event (BCE) occurred when you became entitled to it. So your pension will already have been measured against the lifetime allowance. Your pension scheme administrator will give you a certificate each year telling you what percentage of the lifetime allowance your pension has used up. If your pension started to come into payment before 6 April 2006 how it is valued depends on if you have received any new benefits on or after that date. If you have not taken any more benefits then the value of your pension savings is 25 times the annual rate of the pension in payment. 9

10 If you have received other pension benefits since 6 April 2006 then the value of your pension savings is 25 times the annual rate of the pension in payment at the first date on or after 6 April 2006 that you became entitled to these new benefits. If the pre 6 April 2006 pension in payment is income drawdown then the annual pension rate is the maximum you can draw down. Your pension provider will have told you how much this is. Pensions not yet in payment For savings in money purchase and cash balance arrangements the value is the value of the funds in your arrangement. Your pension scheme administrator will provide you with details of this value once a year. For a defined benefits arrangement, the value is 20 times the pension you expect to get when you retire plus any separate lump sum that you are entitled to. For example, Claire belongs to a defined benefits arrangement and expects her pension to be 30,000 pa when she retires. The scheme also provides a lump sum of 3 times her pension at retirement. For lifetime allowance purposes, the value of her pension savings is 20 x 30, x 30,000 = 690,000. If you have to give up some of your pension in return for a lump sum (commutation) then, for lifetime allowance purposes, you use the value of the pension before commutation. So any lump sum you can chose to take by giving up part of your pension is not included in the calculation. For example, Janet is in a defined benefits arrangement and expects her pension to be 35,000 when she retires. Janet s scheme allows members to convert each 1 of pension into 12 lump sum and she decides to take a pension of 30,000 and a tax free lump sum of 60,000. For lifetime allowance purposes, the value of her pension savings is 20 x 35,000 = 700,000. If you are a member of more than one scheme, you should work out the value for each scheme and then use the total from all of these to decide if you have exceeded the lifetime allowance. How will fixed protection interact with primary protection and enhanced protection? Primary protection and enhanced protection are the two methods whereby individuals could protect pension rights accrued before 6 April The closing date for applying for these protections was 5 April 2009 so you can no longer normally apply for them. Primary and enhanced protection will continue. The reduction in the standard lifetime allowance will not change how enhanced protection works. If you have primary protection the amount of your benefits protected from the lifetime allowance will not change. If you have enhanced or primary protection, you will not be entitled to fixed protection. 10

11 How will I know if I have exceeded the lifetime allowance? Your pension scheme administrator should work out if you are within your lifetime allowance each time that you take benefits from the scheme. How much is the lifetime allowance charge? The rate of the lifetime allowance charge depends on how you take your benefits. The tax rules allow you to take any of your benefits over your lifetime allowance as either a lump sum or as a pension (or as a mixture). However your pension scheme rules may restrict how you can take your benefits. Any amount over your lifetime allowance taken as a lump sum is taxable at 55%. Any amount over your lifetime allowance taken as a pension is taxable at 25%. For example, on 30 June 2012 Paul has a personal pension fund of 2.5 million. This is 1 million more than the lifetime allowance of 1.5 million. Paul decides to use his pension fund to buy an annuity. Paul s options are: Use 1.5 million to buy an annuity and take the 1 million over the lifetime allowance as a lump sum. The scheme administrator would pay the 55% lifetime allowance tax charge of 550,000 from this amount and pay the remaining 450,000 to Paul as a lump sum, or Use 2.5 million to buy an annuity (after paying the 25% lifetime allowance charge on the 1m excess over the lifetime allowance). The scheme administrator would pay the 25% lifetime allowance tax charge of 250,000 from the fund leaving 2.25 million to buy an annuity. Why are there two different rates for the tax charge? The tax rate for lump sums (55%) is higher because a lump sum payment will not be taxed later. Where the excess over the lifetime allowance is paid as a pension the continuing pension will be taxable on the member. The lower 25% lifetime allowance charge plus the likely income tax on the continuing pension normally gives an effective tax rate of 55%. Who is responsible for paying the lifetime allowance charge? Unless the BCE is due to the payment of a death benefit, both you and your pension scheme administrator are jointly responsible for paying the tax charge. However the scheme administrator will normally do this. Where the BCE is due to the payment of a death benefit only the person getting the benefit is responsible for paying the tax charge. How do I tell HMRC that I am liable to the lifetime allowance charge? If you are liable to a lifetime allowance tax charge and you normally complete a Self Assessment tax return, then you should tell HMRC about your liability to the lifetime allowance charge as part of the return. Your pension scheme administrator should have already given you the information that you need to complete the relevant questions on the tax return. 11

12 If you use a paper return you will need to complete the relevant boxes on the additional information pages (SA101) of the return. If you have not completed a tax return before (or it has been a while since you did so), you will need to complete a registration form to let HMRC know what has changed and to get a tax return. Do I need to complete a tax return if my pension scheme administrator has paid the tax charge to HMRC? Yes, you will still need to complete a tax return. The return and help sheets will guide you through the process of working out the pension savings from your pension schemes. Are there any other changes? In certain circumstances where pension benefits are small they can be commuted into a single lump sum payment. The amount of these lump sums is currently 1% of the standard lifetime allowance. From 6 April 2012 this link will be broken and the payment will be limited to a fixed amount of 18,000. In what circumstances is it possible to make these single lump sum payments? Further details are in the Registered Pension Schemes Manual. Trivial commutation lump sums Winding-up lump sums Payments to members already receiving an annuity from the scheme Trivial commutation lump sum death benefit Winding-up lump sum death benefit RPSM RPSM RPSM RPSM RPSM

13 Chapter 3 Impact of a reduced lifetime allowance on pension savings Draft guidance based on the draft legislation published on 9 December 2010 I already get my pension am I affected? If you are already getting your pension from a registered pension scheme and will not be getting any more additional benefits from that or any other registered pension scheme in the future then you will not be affected by the change in the lifetime allowance. If you are already being paid a pension but are expecting to get further additional benefits you may be affected. However you will only be affected if your total pension benefits are more than 1.5 million. I am retiring in 2012 am I affected? If you take all your benefits from a registered pension scheme on or before 5 April 2012 then you will not be affected by the reduction in lifetime allowance. If you take some of your benefits before 6 April 2012 and some after 6 April 2012 then you may be affected when you take the rest of your pension benefits. However you can only be affected if your total benefits are more than 1.5 million. Example Thomas is a member of a money purchase scheme. In June 2011 Thomas takes part of his benefits from the scheme worth 1.2 million. In June 2011 the lifetime allowance is 1.8 million so Thomas has used up two thirds of his lifetime allowance. In February 2013 Thomas takes the rest of his benefits from the scheme. Thomas has already used up two thirds of the lifetime allowance. This means that if his benefits are more than one third of the lifetime allowance Thomas will have to pay the lifetime allowance tax charge. The lifetime allowance in February 2013 is 1.5 million. One third of the lifetime allowance is 500,000. Thomas takes benefits worth 600,000. This is 100,000 more than his available lifetime allowance. Thomas has no form of protection from the lifetime allowance charge. This means he has to pay the lifetime allowance charge on 100,000. If you take benefits on or after 6 April 2012 then you will use the standard lifetime allowance of 1.5 million unless you have applied for fixed protection. If your benefits from all your registered pension schemes are less than 1.5 million then this change will not affect you. I am taking my benefits early am I affected? The lifetime allowance will apply to you in the same way, whether you take your benefits early (early retirement) or at normal retirement age. 13

14 I think that I will be affected by the reduced lifetime allowance what can I do? If you think that the reduction in lifetime allowance will affect you then you can claim a new type of protection called fixed protection. However, you will not be able to apply for fixed protection if you have enhanced or primary protection. I am in an overseas scheme will it affect me? The lifetime allowance rules will apply to you if, since 6 April 2006, you or your employer have received UK tax relief on contributions made to your overseas pension scheme or you do not pay UK tax on the cost of a benefit your employer gives you under an overseas scheme. You will only have to pay the lifetime allowance charge if the total value of your pension saving under UK registered pension schemes, and from tax relieved amounts built up after 5 April 2006 under overseas pension schemes mentioned above (see RPSM ) is more than your lifetime allowance. Your lifetime allowance will be based on the standard lifetime allowance ( 1.5 million in tax year) unless you have applied for fixed protection. What is the maximum I can earn without being affected by the lifetime allowance? The lifetime allowance charge is based on the amount of your pension savings built up over time until you take your benefits. There is no direct link between the amount you earn and the amount of your pension savings. What about savings in non-registered pension schemes? The lifetime allowance rules only apply to your pension savings in registered pension schemes, and overseas pension schemes if you have had UK tax relief in that scheme after 5 April The tax rules for UK non-registered pension schemes (for example, employer-financed retirement benefits schemes (EFRBS)) are not affected by the reduction in the standard lifetime allowance. If I pay an annual allowance charge in the year I exceed the lifetime allowance, can I have a reduced lifetime allowance charge? No you will have to pay the normal rates of tax for the lifetime allowance charge. Does this affect my tax-free lump sum? The maximum tax free lump sum that you can normally take is 25% of your pension fund subject to an overall limit of 25% of your lifetime allowance. However this overall cap on the lump sum will only affect those who have pension savings of more than the lifetime allowance. 14

15 Example Brenda has money purchase benefits in a registered pension scheme of 70,000 at June 2011 and does not have enhanced protection or primary protection. She is not a member of any other registered pension scheme. She decides to apply for the new fixed protection. She decides to take the maximum lump sum in June 2013 by which time her fund has grown to 77,500 and puts the remaining fund into income drawdown. The maximum lump sum that she can take is 25% of her fund of 77,500. So she takes 19,375 as a lump sum and designates the remainder of the fund ( 58,125) for the provision of unsecured pension. Her total benefits for lifetime allowance purposes in June 2013 are 77,500 which is less than her protected lifetime allowance of 1,800,000. This means that there will not be a lifetime allowance charge. Clearly there would have been no lifetime allowance charge on Brenda even if she had not applied for fixed protection and had relied on the standard lifetime allowance of 1,500,000. If I retire on 31 March 2012 but do not get my pension or tax-free lump sum until after 6 April 2012 what will this mean? The lifetime allowance test is applied whenever you become entitled to your pension or lump sum. The date that you become entitled to your benefits for tax purposes is often not the day you retire. For example if you have not given the pension scheme all the information it needs to pay your benefits you cannot have become entitled to your pension for tax purposes. Your pension scheme administrator will be able to tell you the date that you become entitled to your pension. Under the tax rules you become entitled to your lump sum immediately before you become entitled to the connected pension benefit so this date will also be the date on which you become entitled to your lump sum. Example On 1 April 2012, Jacek becomes entitled to a pension of 75,000 and a separate lump sum of 300,000 from his employer s registered pension scheme. Under the tax rules the value of Jacek s pension rights are 75,000 x ,000 = 1.8 million. Jacek is paid his lump sum on 10 April and receives his first pension payment on 30 April. As Jacek s entitlement to both benefits arose on 1 April 2012, his lifetime allowance is 1.8 million so he is not liable for a lifetime allowance charge even though he is not paid any benefits until the tax year when the lifetime allowance is reduced to 1.5 million. If Jacek s entitlement did not arise until after 5 April 2012 and he does not apply for fixed protection he would be subject to a lifetime allowance charge on the value of his benefits ( 300,000) in excess of the 1.5 million standard lifetime allowance. 15

16 I am a member of a registered pension scheme; will the reduced lifetime allowance affect the benefits payable to my dependants when I die? The rules set out a number of occasions when you will use up part of your lifetime allowance. These occasions are referred to as benefit crystallisation events or BCEs for short. The payment of a pension to a dependant after your death is not a BCE so does not use up any of your lifetime allowance. Nor will some types of lump sum death benefits. There are a number of types of lump sums death benefits. Some of these lump sums are BCEs and some are not. The two most common lump sum death benefits are BCEs. These are the lump sum death benefits that will normally be paid if the member dies before taking any pension. They are called the defined benefits lump sum death benefit and the uncrystallised funds lump sum death benefit. The payment of these two types of lump sum is a BCE. These lump sum benefits will be tested against your lifetime allowance and so will be affected by the reduction in the lifetime allowance unless you apply for fixed protection. However, unless the lump sum is likely to exceed 1.5 million you do not need protection. For example, if your employer pays the normal death in service benefit of 4 x salary you would need to be earning over 375,000 a year to get a lump sum death benefit of over 1.5 million. Where the amount of these two types of lump sum is within your lifetime allowance then it is paid tax-free. I will get a dependant s pension how am I affected? You will not be affected. A dependant s pension is not tested against the lifetime allowance. I have not taken my pension benefits yet. I have a protected pension age allowing me to take my benefits before I reach age 50. Am I affected by the change? Yes. The lifetime allowance applies to you in the same way as to any other registered pension scheme member so unless you apply for fixed protection the reduced lifetime allowance will apply to you. In addition, unless you are specifically exempted, the tax rules provide that if you take your benefits before age 55 your lifetime allowance is reduced by 2.5% for each complete year between the date you take your benefits and your 55 th birthday. So if, say, you were to take your benefits in 2014 on your 45 th birthday (10 years before your 55 th birthday) your lifetime allowance is reduced by 25% (2.5% x 10). If you applied for fixed protection, your lifetime allowance is 1.35 million ( 1.8 million x 75%). If you did not apply for fixed protection your lifetime allowance is million ( 1.5 million x 75%). What will my lifetime allowance be if I apply for fixed protection? If you apply for fixed protection then a lifetime allowance of 1.8 million will be used in any lifetime allowance enhancement calculations instead of the standard lifetime allowance amount of 1.5 million. 16

17 I have 17,000 in my pension fund will I be able to trivially commute this after these changes? The trivial commutation limit from 6 April 2012 will be 18,000. So, if you have no other benefits in registered pension schemes you should be able to trivially commute your pension fund providing all the other conditions are met. I have a small pension entitlement in a pension scheme that is winding up and the scheme administrator has told me that they may pay out my benefits as a single one off payment do I need to apply for protection? No the amount that can be paid as a one off lump sum payment on a scheme winding up will remain at 18,000 even after the reduction in lifetime allowance so you will not need to apply for protection. 17

18 Chapter 4 Fixed protection for pension savings Draft guidance based on the draft legislation published on 9 December 2010 There will be a new form of protection, fixed protection, available for individuals who expect the amount of their pension savings to be greater than 1.5 million when they come to take their benefits on or after 6 April Who can apply for fixed protection? If you do not have either primary protection or enhanced protection you can apply for this new form of protection. You do not need to already have built up pension rights of more than 1.5 million to apply. However if you have fixed protection there are restrictions on what you will be able to do with your pension savings. For example, you will normally need to stop building up benefits under every registered pension scheme that you belong to by 5 April Remember, your pension scheme or employer may need time to stop your active membership. Don t leave it to the last minute. How do I apply for fixed protection? If you want to apply for fixed protection there will be a prescribed form. This form is not yet available. When it is available you will be able to get a copy of this form from the HMRC website. Further advice about how and when to apply will be published in due course in further guidance. When can I apply? You will be able to apply for fixed protection from a given date next year until 5 April Applications received after 5 April 2012 will not be accepted. You will need to make sure that HMRC gets your fully completed form by 5 April Further advice about how and when to apply will be published in due course in further guidance. Should I apply? You will need to consider your own particular circumstances before deciding whether to apply. You may wish to seek independent professional advice before making any decision. Can I apply on-line? No, you will not be able to apply for fixed protection on-line. To get fixed protection you will need to complete the application form. You will be able to print off a copy of this form from the HMRC website. This form is not yet available. 18

19 What information will I need to give to make an application for fixed protection? To complete the application form for fixed protection you will need to give your Name National insurance number Address and confirm that you do not have enhanced or primary protection and sign the declaration on the form. You will not need to give any valuation of your current or expected pension funds as part of your application. Will HMRC accept all applications for fixed protection? As long as you complete the prescribed form giving all the information that is requested and you sign the declaration then HMRC will accept your application. Your completed and signed form must also be received by HMRC by 5 April Applications received after 5 April 2012 will not be accepted. How will I know if HMRC has accepted my application for fixed protection? When HMRC has received and processed your form they will send you a certificate to state that you have fixed protection. You will need to keep this certificate safe so that you can give this information to your pension scheme(s) when you come to take your benefits if you want to rely on this protection. When is the last day for applying? Applications must be received by HMRC no later than 5 April Will HMRC accept late applications? There will not be any provision for late applications. Individuals affected therefore must ensure that applications are made on time. What will my lifetime allowance be if I apply for fixed protection? If you have fixed protection your lifetime allowance will be fixed at 1.8 million rather than the standard lifetime allowance of 1.5 million. Your fixed protection will stop if in the future the standard lifetime allowance rises to be more than 1.8 million. Your lifetime allowance will then be the higher standard lifetime allowance. Can I lose this fixed protection? Yes. You will lose fixed protection if you break one of the conditions for fixed protection. You must tell HMRC if you lose fixed protection. If you lose fixed protection then you will revert to the standard lifetime allowance when testing whether or not your benefits are within the lifetime allowance. 19

20 What are the conditions for fixed protection? To keep fixed protection you cannot start a new arrangement other than to accept a transfer of existing pension rights, cannot have benefit accrual, and will be subject to restrictions on where and how you can transfer benefits. If you break one of these conditions you will lose fixed protection. You must tell HMRC if you lose fixed protection. What is benefit accrual? The rules for when benefit accrual occurs vary depending on which type of pension arrangement you belong to. If you have benefit accrual under just one of your pension arrangements you will lose fixed protection. For a money purchase arrangement benefit accrual happens if after 6 April 2012 You pay a contribution to the arrangement, Your employer pays a contribution to the arrangement for you, or Someone else, other than you or your employer pays a contribution to the arrangement. An exception to this no contribution rule is that contributions may continue to a life assurance policy providing death benefits that started before 6 April For defined benefits or cash balance arrangements benefit accrual will occur if in any tax year from onwards, the value of your rights over the tax year has gone up by more than the relevant percentage. What is the relevant percentage? The relevant percentage is either an annual rate used to increase your rights and which was specified in your scheme s rules on 9 December 2010 or, if none, the percentage by which the consumer prices index (CPI) increased in the year ending in September of the previous tax year. So for the tax year it will be the percentage increase in the CPI for the 12 month period ending September If there is no increase or a fall in the CPI in this period, then the percentage rate is nil. Defined benefits schemes normally specify a percentage rate by which deferred benefits will increase each year until the time when the member takes their benefits. For an active member, benefits will normally increase in value by reference to years of service and pensionable salary rather than by a percentage rate. So the relevant percentage for an active member of a defined benefits scheme will be the increase in CPI. What about National Insurance rebates? Payment of National Insurance rebates to your pension scheme will not cause you to lose fixed protection. 20

21 What about auto-enrolment? Some employers automatically put their employees into their pension scheme. From October 2012 under the provisions of Pensions Act 2008 some employers will start to be required to auto-enrol employees into a pension scheme. If your employer auto-enrols you in a new pension scheme under the provisions of Pensions Act 2008, you will have one month from the enrolment date to opt out of the new scheme. If you opt out within that one month period then the law treats you as if you were never a member of the pension scheme. So if you are auto-enrolled under the Pensions Act 2008 provisions and opt out within one month you will keep your fixed protection. If you do not opt out in time then you will lose your fixed protection. If your employer auto-enrols you into their pension scheme and this is not under the Pensions Act 2008 provisions you will lose your fixed protection. This is because you have no legal provision that will treat you as not having been a member of the scheme. You will have started a new pension arrangement and so will have triggered loss of fixed protection. If you have applied for fixed protection and think that auto-enrolment into a new scheme will mean that you will lose this then you should speak to your employer or prospective employer. You will be able to opt out of membership and your employer will be able to tell you how you can do this. If you change employer your new employer may auto-enrol new employees into their pension scheme. If you have fixed protection you may need to opt out of the pension scheme before you have even joined it. Do I have to tell HMRC if I lose fixed protection? Yes, it is your responsibility to tell HMRC that fixed protection no longer applies. Can I still make contributions (if I have fixed protection)? If you make contributions to a money purchase arrangement you will lose fixed protection. You may be able to make further contributions to a defined benefits or cash balance arrangement. But the way that your benefits are calculated may mean that there is benefit accrual if your benefits increase by more than the relevant percentage. If that is the case you will lose the protection. Can I still be in an occupational scheme? Yes you can remain a member of an occupational scheme without losing your fixed protection. However, your fixed protection will be lost if there is benefit accrual. Do I need a valuation of my pension fund to apply for fixed protection? No. You do not need to have built up pension right of more than 1.5 million to apply for fixed protection. You will not need to give a valuation of your pension savings on the form when you apply for fixed protection. 21

22 How much do I have to have (in my pension fund) to apply for fixed protection? Anyone who has pension savings in a registered pension scheme, and who does not have primary or enhanced protection, can apply for fixed protection. But you are only likely to need fixed protection if you think that your benefits from all registered pension schemes will be more than 1.5 million when you take your benefits. I expect to have pension rights over 1.8 million on 5 April Can I apply for fixed protection? Yes if you do not have primary or enhanced protection. If I apply for fixed protection and stop accruing benefits in my employer s defined benefits scheme will I still be able to get a death in service benefit if I die in service? Under the tax rules it is possible for death in service benefits to be provided even if you are not building up a pension. A death in service benefit is not considered to be part of your pension rights. So if you continue to be provided with a death in service benefit it will not be benefit accrual and so will not cause loss of fixed protection. However your scheme may choose not to provide death in service benefits if you stop building up pension benefits. This will depend on the rules of your scheme. I want to apply for fixed protection. If my money purchase arrangement receives a National Insurance rebate will this count as a contribution meaning that I lose the protection? No. For the purposes of benefit accrual, a National Insurance rebate is not a relevant contribution so payment of this into your pension scheme will not cause you to lose protection. Can I join a new pension scheme and keep fixed protection? You can only join a new pension scheme and keep fixed protection if all that the new scheme does is receive a transfer of pension rights from an old scheme. The transfer must be one that does not cause you to lose fixed protection. So, for example, you could transfer benefits from one personal pension scheme into a new personal pension scheme. As long as no contributions are paid to the new personal pension scheme you will be able to keep fixed protection. What pension schemes can I transfer to and keep fixed protection? You can only transfer pension rights from a money purchase arrangement to another money purchase arrangement. The money purchase arrangement receiving the transfer must be held under either a registered pension scheme or a recognised overseas pension scheme. You can transfer from a cash balance arrangement or defined benefits arrangement to A money purchase arrangement under a registered pension scheme or a recognised overseas pension scheme, Another cash balance arrangement but only if the transfer is made because - the pension scheme making the transfer is winding up, or - your employer has sold all or part of their business and your benefits are being transferred to your new employer s scheme. 22

23 What transfers will cause me to lose fixed protection? You will lose protection if you transfer to A scheme that is not a registered pension scheme or a recognised overseas pension scheme. A transfer is made from a money purchase arrangement to either a cash balance arrangement or a defined benefits arrangement. A transfer is made from a cash balance or defined benefits arrangement to another cash balance or defined benefits arrangement where the transfer is not made because - the transferring scheme is winding up, - your employer has sold all or part of their business and your benefits are being transferred to your new employer s scheme. When is a contribution paid? The rules for when a contribution is paid depend on how the contribution is made. For example, if the contribution is made by cheque then it is paid when the cheque is received by the scheme administrator, as long as the cheque is honoured (see RPSM for more detail). What happens if my bank or building society doesn t cancel a standing order or direct debit for contributions in time so that a contribution is paid by mistake? Will I lose my fixed protection? If you have told your bank or building society in good time that you want to stop the payment but they have failed to act on this then you will not lose fixed protection. Here, the payment(s) made by the bank or building society were beyond your control and you never intended that the payments should be contributions. HMRC will not consider such payments as contributions and so fixed protection will not be lost. The payments should be returned to you although you will have to repay any tax relief you have received in relation to them (see RPSM for more detail). I am a member of a money purchase personal pension scheme. If I apply for fixed protection will I lose it if I later receive a pension credit under a pension sharing order? No, provided the pension credit is transferred to your existing money purchase arrangement under your personal pension scheme. The tax rules provide that a pension credit in such cases is not a tax relievable contribution so its payment will not cause loss of the fixed protection. However if the pension credit is received from a non-registered pension scheme it is tax relievable. Fixed protection will be lost if it is paid into a registered pension scheme. Likewise, if the pension credit is transferred into a new arrangement for you, fixed protection will be lost. This is because the setting up of the new arrangement will trigger the loss of fixed protection. I am a member of a defined benefits/cash balance pension scheme. If I apply for fixed protection will I lose it if I later receive a pension credit under a pension sharing order? 23

24 If the pension credit is transferred into a new arrangement for you, fixed protection will be lost due to the setting up of the new arrangement. If the pension credit is transferred into an existing defined benefits or cash balance arrangement then fixed protection will be lost if at the end of the tax year in which the pension credit is transferred into the arrangement benefit accrual occurs. It is very likely that there will be benefit accrual in such cases. Examples NOTE 1: You will need to carry out the test to see whether you have had benefit accrual and you will need to do this in every tax year that you have fixed protection. You are responsible for doing the test because you have signed the declaration when you applied for fixed protection. However, you may need to ask your pension scheme administrator for information to help you carry out the test. NOTE 2: These examples do not take account of the impact of the reduced annual allowance. In some of the examples there may therefore also be a liability to an annual allowance charge. If you are liable for an annual allowance charge in the year that you exceed the lifetime allowance, you will not get a reduced lifetime allowance charge. Example 1 Sarah is a member of a defined benefit scheme. Sarah applies for fixed protection. She also tells her scheme that she wants to stop accruing pension benefits. Under the rules of Sarah s pension scheme she will still get a death in service benefit of a lump sum of four times salary, and her deferred pension is increased by 5% each year. This rule has been in place since before 9 December As the death in service benefit is not part of Sarah s pension rights this will not cause her to lose fixed protection. As Sarah s pension is increased in line with an annual rate specified in the scheme rules prior to 9 December 2010 she will not lose fixed protection. Example 2 Roger is a member of a defined benefits scheme. His scheme gives him a pension of 1/60 th of pensionable salary for each year of service. To get a lump sum Roger has to give up (commute) part of his pension. If Roger dies before he starts drawing his pension a lump sum of four times salary will be paid. Roger applies for fixed protection but does not cease active membership of his scheme and continues to build up benefits after 5 April From onwards Roger needs to check each tax year to see if he has lost fixed protection. He does this by testing whether 24