Jill Clucas: How the lifetime allowance reduction will impact benefits and charges

The lifetime allowance (LTA) was reduced from £1.5 million to £1.25 million on 6 April 2014. 

When an individual draws pension benefits, the value of the benefit drawn is tested against the LTA (reduced by the value of benefits taken previously). 

With a reduced LTA, more individuals will be subject to the LTA charge, which is 55% on lump sums or 25% on pensions (in addition to income tax).

Limited protection is available for those with large undrawn pension benefits. Fixed protection 2014 enables an individual to retain an LTA of £1.5 million, but the individual must cease benefit accrual, otherwise the fixed protection will be lost. 

Continued provision

Continued provision of death benefits through a registered pension scheme can constitute benefit accrual for this purpose. Consequently, many employers are establishing excepted group life policies and relevant life policies to provide death benefit cover for senior staff.

These policies have the additional advantage that death benefits paid are not subject to the LTA. Those with fixed protection should remember to opt out of any pension arrangement they are opted into under the auto-enrolment requirements, otherwise, the protection will be lost. 

Since 6 April, individual protection 2014 provides a personalised LTA of the value of an individual’s accumulated pension benefits, to a maximum of £1.5 million. Continued benefit accrual is allowed, but benefits exceeding the value of the personalised LTA will be subject to the LTA charge. 

Fixed protection would have to have been applied for before 6 April 2014, whereas applications for individual protection may be made until April 2017.

Alternative offering

As continued accrual in a registered pension scheme is unlikely to be appropriate for individuals with pension pots exceeding £1.25 million, many employers are instead offering senior employees accrual in an employer-financed retirement benefits scheme (EFRBS) or, simply, additional cash. 

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Taking lump sums in excess of the lifetime allowance should not be confused with the flexibility, announced in the Budget 2014, to take defined contribution pension pots up to the level of the lifetime allowance as a lump sum taxed at marginal rates from 2015.

Jill Clucas is of counsel at Hogan Lovells International