Lifetime allowance fixed protection - how does it work?

peterg1965

I will be applying for LTA fixed protection when I can to preserve a £1.5M Lifetime pension allowance, vice the new reduced £1.25M limit from April 14.

My question is, is it appropriate and permitted in my situation? The HMRC technical notes don't spell it out in language and detail I understand.

I have two pensions; one SIPP which I will stop paying into by March 14, no problem. My second (main) pension is a DB final salary scheme and I am still employed in this job, this is where i do not understand the implications. I am 47, can draw the pension at any time, but will probably stay in this employment until I am 53-55. I am at the top of my pay band with almost no chance of further promotion, so as far as pay and pension increases go this will be limited to annual pay awards which I suspect will actually be less than inflation over the next few years. So the pension input amount will increase annually but at a rate less than RPI/CPI, so is this permissible under fixed protection rules?

If I were, for whatever reason, to breach the fixed protection rules, having applied for it, is there any penalty other than a simple reversion to the newer, lower, amount?

Does State Pension count towards LTA? - suspect not, but just need to be absolutely clear.

I guess that any further employment beyond 55 I will need to positively withdraw from any occupational/employer pension scheme that is offered.

Thanks for any comments from the resident IFAs/experts.

Aegis

peterg1965 wrote: »

I will be applying for LTA fixed protection when I can to preserve a £1.5M Lifetime pension allowance, vice the new reduced £1.25M limit from April 14.

My question is, is it appropriate and permitted in my situation? The HMRC technical notes don't spell it out in language and detail I understand.

I have two pensions; one SIPP which I will stop paying into by March 14, no problem. My second (main) pension is a DB final salary scheme and I am still employed in this job, this is where i do not understand the implications. I am 47, can draw the pension at any time, but will probably stay in this employment until I am 53-55. I am at the top of my pay band with almost no chance of further promotion, so as far as pay and pension increases go this will be limited to annual pay awards which I suspect will actually be less than inflation over the next few years. So the pension input amount will increase annually but at a rate less than RPI/CPI, so is this permissible under fixed protection rules?

Bear in mind that most DB schemes will automatically escalate the pension amount in line with inflation, so any additional accrual will breach the terms of your fixed protection. On top of that, an additional year of service will increase the final ratio of your salary that you receive, unless you have already reached that cap (e.g. 40 years service maximum is common).

You are deemed to have accrued benefit within a DB scheme if your year 2 pension rights less your year 1 pension rights uplifted by inflation results in a positive number, regardless of the size of that number.

If I were, for whatever reason, to breach the fixed protection rules, having applied for it, is there any penalty other than a simple reversion to the newer, lower, amount?

Potentially a penalty if you don't let HMRC know that you have rescinded your fixed protection. The exact penalty hasn't been confirmed yet, but it would be safe to assume a £300 penalty like it was in the last round of fixed protection.

Does State Pension count towards LTA? - suspect not, but just need to be absolutely clear.

It doesn't, no.

I guess that any further employment beyond 55 I will need to positively withdraw from any occupational/employer pension scheme that is offered.

Quite possible that you'll need to opt out now rather than at 55.

Your best bet might be to actually sit down with an IFA to discuss this with all the information to hand. You probably need to run cashflow projections with a number of differing assumptions to see the net benefits of maintaining accruals and paying the lifetime allowance charge vs opting out and benefiting from the protection. There's often no absolutely conclusive right answer because of the number of variables, but you'll have all the information you need to make the right decision.

Hopefully this helps with a bit more background information though.

mania112

I know this doesn't directly answer your questions, but I read this the other day:

The Chancellor's Autumn Statement – More simplification!
The need to find more funds for the country's coffers has, not surprisingly, resulted in further tinkering with the rules for pensions including the maximum level of benefits that can be taken, and the maximum contributions that can be paid, without incurring tax penalties.

The Standard Lifetime Allowance

The Standard Lifetime Allowance (SLA), that was reduced from £1.8m to £1.5m last April, is now to be reduced further to £1.25m from 6th April 2014. With this change will come not one but two further protection options.

Firstly there will be another Fixed Protection option (known as Fixed Protection 2014) under which a scheme member can secure maximum benefits of up to the greater of £1.5m or the SLA.

Elections must be made before 6th April 2014 and the protection will be lost if if there is further benefit accrual or contributions made from this date.

The second protection option is Personalised Protection under which the maximum benefits for the member will be the greater of the value of an individual's pension rights (subject to a maximum of £1.5m) on 5th April 2014 and the SLA. This is to protect people from retrospective tax charges. However, the member must have pension rights of at least £1.25m on 5th April 2014 but will be able, unlike under Fixed Protection 2014, to accrue further benefits without losing this protection.

Workplace Pensions – a couple of warnings

So Autoenrolment (a.k.a. Workplace Pensions) has finally arrived with large employers now having to ensure that all their eligible employees are enrolled into a qualifying workplace scheme, or have opted out of this scheme where requested and allowed to do so.

For many people, joining a workplace scheme is still some way off, but there are a couple of potential pitfalls that need to be considered.

Losing Protection From The Lifetime Allowance As A Result of Autoenrolment Enhanced protection and primary protection were introduced to protect people’s existing pension benefits accrued prior to the introduction of the Lifetime Allowance (LTA) in April 2006.

Fixed protection was introduced when the subsequent reduction of the LTA from £1.8 million to £1.5 million came into force on 6th April 2012. Where an individual is automatically enrolled into a qualifying workplace pension scheme, it is possible that enhanced and fixed protection may be lost unless specific action is taken. Primary Protection, however, is not affected by Autoenrolment.

One of the rules that must apply for enhanced and fixed protection to continue is that no further benefit accrual should occur in respect of the individual to whom the protection applies.

All employees must be enrolled into qualifying workplace pension schemes, so individuals with enhanced or fixed protection must opt out to ensure they do not accrue additional benefit in the scheme.

Having opted out, they must then opt out again every three years to ensure the protection is not disqualified.

There is a further issue here if employees are enrolled under contractual rather than under the Autoenrolment provisions. If these provisions do not include a clause allowing the employee to
opt out, then employees who have fixed or enhanced protection will lose their protection in any event as they will be unable to stop new pension benefit accruing.

The Government are currently consulting on whether the duty to enrol particular employees who benefit from protection should be removed.

Flexible Drawdown

A member may have satisfied the criteria to qualify for being able to take benefits under Flexible Drawdown, but some of these criteria may cease to be satisfied as a consequence of having to join a workplace scheme.

Again, any problem can be avoided as long as the member remembers to opt out of their employer's scheme and remembers to do this every three years. However, as detailed in the previous section, where the member is enrolled under contractual provisions they may not be able to opt out and thus will start accruing benefits in the scheme. As a result, any contributions paid or benefits accrued will be subject to the Annual Allowance tax charge.

Furthermore, if benefits start to accrue in the year the Flexible Drawdown declaration is completed, then the declaration is invalid and any payments made in excess of the capped drawdown limits will be treated as unauthorised payments and therefore subject to the relevant tax charge.

- Snippets from a Transact mailing.

peterg1965

Thanks.

Its the benefit accrual of the DB pension which is potentially going to catch me out and there is nothing within my control to affect it. I assume it is all about the annual valuation of the pension (pension inout amount), along the lines I do at the moment to work out how much of my AA I have used up. You use the CPI figure for the september of the previous tax year to uplift the starting amount for inflation if I recall?

Once I have fixed protection whose responsibility is it to check if my DB pension breaches the rules? Mine, HMRC or my employer?

mania 112, useful tip in there about opting out of auto enrolement every 3 years, I would never had known this. I have heard anecdotally that HMRC will withdraw the fixed protection even if additional accrual is unintentional and even if not the fault of the individual.

A further question, if you exceed the LTA by say £200,000. What are the exact tax penalties. I hear of 55% and 20% tax applied, but how if this done? Is this in addition to your marginal income tax rate? So, you could take the 25% 'tax free' of the £200K, this incurs a penalty of 55% so you would only get £22.5K of the £50K and what of the remaining £150K would incur an extra 20% taxation above my expected marginal rate of 40% (so 60% tax) is this correct?

mania112

If you exceed the LTA you have 2 options

1) Take the excess as a pension.

This would incur an immediate 25% tax penalty. The pension that the remainding money buys will be paid to you through PAYE and income tax rules apply.

2) Take the cash lump sum.

An immediate charge of 55% and the remaining paid to you in full.

- These rules may be recognisable as they're the same as death benefits in a money purchase scheme (when the pension is in payment) minus the 25% charge for starting/continuing a pension.

peterg1965

Thank you mania112. Fairly punitive! I suppose I could always hope for a gradual rise in the LTA over the next 7/8 years but I suspect this will definately not happen. Something tells me a £1.25m level will be here to stay for a generation. It will become very polictical, any attempt to raise it will always attract screams from the left of tax reductions for the wealthy, whether there is truth n this or not. It was very 'un Conservative' to lower it twice in the space of 4 years.

peterg1965

Apologies, one other supplementary question. If I crystallise both the DB and the SIPP on my 55th birthday, do I get a choice as to which one takes primacy? It could well be that the SIPP would give me more financial flexibility over the DB pension, or would it be madness to have the final salary pension reduced by the excess LTA taxes?

I am also slightly confused by how to value the DB pension. I have seen it stated as 20 times the initial pension plus the lump sum. However, I also receive an annual pension input figure (do I use this), which seems to suggest that the valuation is worked out by 16 times the pension plus the lump sum (which is three times the pension) so 19 times the pension in total.

mania112

This is a tricky area (and you should definetely speak to an IFA about this, find one at https://www.unbiased.co.uk).

With Defined Benefits i'm sure i'm right in saying that for LTA purposes you take the annual pension and multiply it by 20.

That gives you the £x of £1.25m you'll be using from your final salary. The pension can be estimated forward to retirement age, but largely you won't know exactly what that figure is until you retire.

Retiring at 55 (which I assume is earlier than you ideally want and probably earlier than the default age of your scheme) will reduce your final annual pension, so trying to do that to reduce the affect of LTA - will a) cause you to lose 100% of the excess rather than 55% (if you achieve it) and b) mean you'll start spending money early, that was meant for retirement.

Point is, Final Salary schemes do not have a pot value that is easily correlated to the benefit it will pay you. It depends on a number of factors - its nowhere near as simple as a personal pension which has a value equal to the value of the investments inside it.

Secondly, Final Salary pensions vary from scheme to scheme, which is why I suggest speaking directly to an IFA.

peterg1965

Thanks mania, the default retiring age for my DB scheme is 55, although I can retire now and know Precisely what I will get, to be honest there is just £3k difference between retiring now (£32k pa without commutation) or £36k if I stay the course until 53 (the compulsory entire meant age at my level ). I have just about topped out as I am at my top increment. I cannot work in this scheme beyond 53, this is the compulsory retirement age, but i am inclined to challenge this. It's the AFPS 75 scheme.

Whilst I am firmly in the DIY camp in terms of managing my SIPP, I will, as you suggest, take professional IFA advice when it comes to crystalisation of both pensions. In the short term though I need to understand with a high degree of certainty how the pension is valued by HMRC. I hope it is the 'pension input value' or CETV which I get every year to determine AA usage. One of the downsides of my scheme is the woeful customer service from SVPA - the scheme administrators.

mania112

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/34263/20120803LTABookletMMP144.pdf

From point 6 onwards, I think you'll find this very helpful.

It confirms what I thought. 20x your annual pension + any lump sum.

Your options for exceeding LTA are also outlined and as mentioned.

It's not up-to-date in terms of the latest changes - but the way the process works will almost certainly be the same.

peterg1965

mania112 wrote: »

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/34263/20120803LTABookletMMP144.pdf

From point 6 onwards, I think you'll find this very helpful.

It confirms what I thought. 20x your annual pension + any lump sum.

Your options for exceeding LTA are also outlined and as mentioned.

It's not up-to-date in terms of the latest changes - but the way the process works will almost certainly be the same.

That is just precisely the information I have been searching for thank you mania112. It answers all my questions.

If I apply for fixed protection my DB pension is effectively frozen from April 2014 and just increased for CPI on an annual basis. Not what I expected and it may not be advantageous to do that. But I now need to do some number crunching and try and guess the performance of my SIPP over the next 7.5 years!

Thanks again.