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New Fixed Protection Regime to be Introduced

From 6 April 2014 the UK Government is reducing the Lifetime Allowance (“LTA”) from £1.5MM to £1.25MM. The LTA was introduced by the UK Government in April 2006 and was a limit against which an individual’s pension is measured. Although there are no limits to how much an individual can save into their UK pension scheme(s), there is an overall limit on the total amount of an individual’s tax-relieved pension savings. In April 2006 the allowance was £1.5MM and by 2011 this had increased to £1.8MM.

Any pension benefits in excess of the LTA are subject to a tax of either 55%, if the benefits are taken as a lump sum, or 25% if they are used to provide an income which would then be subject to income tax.

Most people are unlikely to have current pension savings near to or in excess of the new £1.25MM LTA. However, consideration needs to be given to whether you could have such savings at the time of retirement. For example, if you are in your 30s or early 40s, could your pension fund grow to such levels by the time you reach retirement?

Individuals who do not already have “Primary Protection”, “Enhanced Protection” or “Fixed Protection 2012” will be able to register for “Fixed Protection 2014” to retain a LTA of £1.5MM. Registration will be available once the applicable legislation has entered into force in August 2013. The deadline for applying for such protection will be 5 April 2014.

If you are a British expatriate, it is unlikely that you will still be contributing to your UK pension. For this reason, there are unlikely to be any real disadvantages to applying for Fixed Protection 2014 (if you do already have one of the protections noted above). Once Fixed Protection is applied for, in order to maintain it, you must ensure you do not:

  • start a new UK pension arrangement other than to accept a transfer of existing pension rights; and/or
  • make further contributions.

Other rules may also apply in particular circumstances.

The UK Government is also consulting on a new “Individual Protection” regime to accompany the reduction of LTA to £1.25MM. Individual Protection would give individuals a personalised LTA based on the value of their pension savings at 5 April 2014. It will allow individuals to continue contributing to their UK pension savings after this date whilst protecting the tax relieved savings accrued up to that date up to the £1.5MM limit. It is expected that final legislation on Individual Protection will be introduced in the Finance Bill 2014.