Preserve your lifetime pension allowance

Currently the standard lifetime pension allowance is £1.8 million, but this will fall to £1.5 million in the next tax year. You can take steps to preserve the higher allowance, by electing for fixed protection, but the form has to be received by HMRC’s specialist pensions office in Nottingham, before 6th April 2012.

Your lifetime allowance need not fall….
If nothing else, the pensions industry is a great generator of paperwork, be it forms, returns, legislation or guidance. HMRC has now added some more pages, one of which could be important to you: form APSS227.

The form is needed because of a major change to pension taxation, which was legislated for in this year’s Finance Act, and which will take effect on 6 April 2012. On that date there will be a reduction in the standard lifetime allowance, which effectively sets the normal tax-efficient limit on the value of your pension benefits. At present the standard lifetime allowance is £1.8m, but from next tax year it falls to £1.5m, the level at which it started life in April 2006.

Once the allowance is cut, it could be many years before the £1.8m figure is regained. The Treasury made clear in its 2010 consultations that the government was not planning any future uplifts to the standard lifetime allowance, whereas previously it had issued a five year schedule of increases. Freezing the allowance effectively leaves inflation to erode its value and thus saves the Treasury money. It is a classic example of what economists call ‘fiscal drag’, probably the oldest and most widely used stealth tax mechanism in any Chancellor’s armoury. Next year’s unchanged starting point for higher rate tax is another example.

..there is a solution
Fortunately, the standard lifetime allowance reduction has been accompanied by transitional provisions, which can limit the impact if you are among those who could be affected by the change. The new ‘fixed protection’ rules will allow you to keep £1.8m as your lifetime allowance until such (distant) time as the standard lifetime allowance rises above it. This is where the new form comes in, as an election for ‘fixed protection’ must be made on form APSS227 and sent to HMRC’s specialist pensions office in Nottingham (not your tax office).

The steps you must take
Unsurprisingly, APSS227 is no simple get-out-of-jail card:

  • It must be received by HMRC before 6 April 2012, so you have little more than five months to decide whether to make the election.
  • If you do opt for fixed protection, as a general rule from 6 April 2012 any further pension contributions or accrual of benefit (e.g. as an active member of a final salary pension scheme) will automatically revoke your election and leave you with a £1.5m standard lifetime allowance.
  • If you do automatically lose fixed protection as described above, you must notify HMRC within 90 days or risk a penalty.
  • If you elected for primary protection, an earlier form of transitional protection introduced in 2006, you cannot now choose fixed protection.
  • If you elected for enhanced protection, the other earlier transitional protection, then you must revoke that election by 5 April 2012 if you wish to choose fixed protection.

For most, but not all people, the requirement to end further contributions/pension accrual makes fixed protection an unattractive option.

If you have built up substantial pension benefits and you do not have enhanced or primary protection, it could be worth opting for fixed protection. The decision is a complex one and involves a variety of factors, such as the structure of your current pension arrangements and how far you are away from retirement. APSS227 may be a short form, but it can have some very significant effects. If you think it might be relevant to you, please contact us immediately, as the decision can require a great deal of research.

If you have any questions regarding pensions and retirement planning, please contact us on 020 3865 2379

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