Pensions: Changes to Lifetime Allowance
Changes in the 2021 Budget
In April 2016 the Lifetime Allowance (LTA) reduced from £1.25 million down to £1 million and had since received increases in line with inflation, with the allowance standing at £1,073,100 from 6 April 2020. This limit has now been frozen in the March 2021 Budget at £1,073,100 for the tax years up to and including 2025/26.
Inflation remains low at under 1%, so the implications if you are retiring in the next financial year are relatively small as the limit would not have increased by much anyway. The cumulative effect if you are retiring nearer the end of the frozen period, however, are more significant. Even if inflation were 1% in the intervening years, the limit would have risen to £1,127,839, meaning £54,739 more capital value of pension would be covered. The freezing of the limit, even at 1%, would therefore mean an extra £13,685 of tax due. At 2% inflation, the extra tax would be nearly £28,000.
What should I do?
Individual Protection 2016 (IP2016) is still available for those with pension savings in excess of £1 million at 6 April 2016 and can protect the pot up to £1.25 million. Individuals should arrange for a review of their pension savings with their financial advisor to consider if they could be in danger of exceeding the lifetime allowance of £1,073,100. The exposure to the limit is calculated as 20 times the pension plus any lump sum. Broadly this means that a member of the 1995 section of the pension scheme retiring on a pension of more than £46,656 may pay an LTA tax charge. Commuting of pension to take more lump sum can also reduce the capital value for LTA purposes and therefore reduce the exposure.
No deadline date has currently been set for an application for IP2016, as long as it is done before benefits are drawn, so it is worth checking your pension statements and speaking to us for assistance in applying if you meet the criteria.