With less than four months to go until the reduction in the pension lifetime allowance, the latest Finance Bill 2016 draft legislation set out the new £1m cap, while the government confirmed that the review of pension tax relief has been deferred until the March Budget
From April 2016, the standard lifetime allowance will be reduced to £1m for the 2016-2017 tax year onwards. From 2018-19, it will be increased annually in line with the Consumer Prices Index. This will generate a £1.9bn boost for the Exchequer over the next five years increasing the tax bill for affected taxpayers, which could number at least 55,000 individuals.
Transitional protection (‘fixed protection 2016 and individual protection 2016’) will be introduced to provide individuals with pension savings of up to £1.25m protection from retrospective taxation, subject to certain conditions.
This will be a costly exercise for employers and pension schemes affected by the changes with HMRC estimating one-off costs of £46.6m to accommodate the changes and annual running costs of £200,000 per annum.
There will also be substantial IT investment costs for HMRC estimated at £2.4m to get the system up and running, while £500,000 has been set aside for staff resources over the five-year period.
Changes are also being made to Finance Act 2004 to ensure that individuals who have primary or enhanced protection, with no lump sum protection, receive the pension commencement lump sum intended by the legislation.
A new subsection 5BC provides that where an individual has a lifetime allowance enhancement factor under sections 220, 222, 223 or 224 FA2004, (which apply a lifetime enhancement factor in respect of pension credits, relevant overseas individuals and transfers from recognised overseas pension schemes), and a benefit crystallisation event (BCE) occurs between 6 April 2014 and 5 April 2016, then in calculating the individual's lifetime allowance the lifetime allowance enhancement factor is multiplied by £1.25m if this is greater than the standard lifetime allowance.
There is also a provision setting the precedence where an individual has more than one lifetime allowance enhancement factor.
Legislation will also introduce two further transitional protection regimes, ‘fixed protection 2016 (FP16)’ and ‘individual protection 2016 (IP16)’ for individuals with UK tax relieved pension rights of more than £1m or those who think they may have rights in excess of £1m by the time they take their pension benefits.
FP16 and IP16 will work in a similar way to the two previous transitional protection regimes, FP14 and IP14.
Individuals have to obtain a reference number from HMRC if they want to rely on FP16 or IP16, before they take their benefits.
Individuals with FP16 will have a personal lifetime allowance equal to the greater of £1.25m and the standard lifetime allowance. Those with IP16 will have a protected standard lifetime allowance of the value of their pension savings on 5 April 2016 subject to an overall limit of £1.25m.
The lifetime allowance is the maximum amount of pension and/or lump sum that an individual can take from pension schemes that benefit from UK tax relief, including any tax relieved savings the individual has in a relieved non-UK pension scheme.
This reduction will affect individual pension savers, employers who contribute to registered pension schemes for employees and scheme administrators of registered pension schemes and advisers with clients who have UK tax relieved pension savings.
Further information on the lifetime allowance changes is available here
To read more about the Finance Bill 2016 and relevant tax changes, click here