Can You Fix It?

September 28th, 2011

One of the key features of the current pension regime is a ‘ceiling’ on the total value of benefits that an individual can build up during their lifetime (tax efficiently) in registered pension schemes.  This limit is currently £1.8m for tax year 2011/12.

Where an individual accrues benefits in excess of this limit then they are likely to incur a tax charge on the excess when they eventually take their pension benefits.  In simple terms, whenever benefits are ‘crystallised’ they use up a proportion of the lifetime allowance, and, once this allowance is exhausted, any further benefits can be subject to tax charges (know as a lifetime allowance charge) of up to 55%.

There are a number of benefit crystallisation events but, generally speaking, the most common events are when (a) an individual is paid a tax-free cash sum from a pension and/or (b) they commence receiving a lifetime annuity, scheme pension or enter income drawdown.
Pension lump sum death benefits paid from uncrystallised rights before age 75 and any rights which remain unvested on attaining age 75 are also tested against the lifetime allowance.
From 6 April 2012 the lifetime allowance will be reduced to £1.5 million and it is likely to remain at this level for the foreseeable future.

There will of course be some people with total pension rights already over this £1.5 million limit, others who are close to this limit and others who, whilst not necessarily close to this limit at the moment, could reasonably expect to exceed this limit in the future – especially if there is still a long way to go before retirement.

If you expect your pension savings to be more than the lifetime allowance of £1.5 million when you come to take your pension benefits on or after 6 April 2012 you can register for ‘Fixed Protection’ to reduce (or even eliminate) any liability to the lifetime allowance charge. Having fixed protection will mean that you will have a protected lifetime allowance of £1.8 million.

There are, however, some important points to consider before registering for this protection

•    Fixed protection will not be available for anyone who has previously registered for ‘Primary Protection’ – This was a type of protection available when the pension rules changed in 2006 for those who already had pension savings in excess of £1.5m

•    If you apply for protection you will normally have to stop building up any further benefits in registered pension schemes after 6 April 2012.  You may therefore also need to consider whether you should make additional contributions during this tax year whilst you still can.

Fixed Protection Form

The application form for fixed protection is APSS277 and this is now available to download from HMRC’s web-site.

To get fixed protection the application form will need to be completed and posted to HMRC (this form cannot be filed online) but applications received after 5 April 2012 will not be accepted so individuals will need to make sure that HMRC receive the completed form by this date.
As with enhanced and primary protection, HMRC will issue a certificate confirming the fixed protection and individuals will need to keep this certificate safe and give this information to their pension scheme(s) when they come to take their benefits.
If you are unsure whether you are affected by the reduced lifetime allowance or need to consider registering for fixed protection you should contact you Financial Adviser who will be able to offer you guidance on any action you should consider taking

The value of your investment can go down as well as up and you may not get back the full amount invested

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor