Case study - protecting your LTA
A paraplanner working for adviser Paul Starling has pointed out that one of his clients could benefit from taking advantage of the new protection regime in view of the fall in the lifetime allowance (LTA) for pension savings from £1.25 million to £1 million from 6 April 2016.
The paraplanner was concerned as to whether they were too late to consider this.
The client, Jeremy Crow, an ex-banker who left his job on 1 April 2006, aged 50, has a deferred pension and ceased contributing some time ago. Instead he is looking forward to doing more gardening and has taken a small part-time job doing just that.
When he left he had a final salary pension scheme with 25 years of service. At the time of leaving, his:
- pensionable salary was £100,000 and he had accrued benefits on a 1/60th basis;
- deferred pension was 25/60 x £100,000 = £41,667 per annum.
The paraplanner revalued the pension 2.5% a year up to the normal retirement age of 60. This means Jeremy has a revalued pension of £53,337 per annum.
The factor for testing defined benefit (DB) schemes against the LTA is 20 times annual pension. Therefore, assuming no tax-free cash, the value would be £1,066,740.
When Jeremy takes his pension it will be tested against the new LTA of £1 million, which, based on the figures calculated, will mean an excess amount of £66,740. If taken as a lump sum, the tax charge at 55% will apply, so there will be £36,707 to pay, with Jeremy receiving a lump sum of £30,033 and a reduced pension of £50,000 per year.
It makes sense for Jeremy to apply for fixed protection to protect up to £1.25 million.
If someone wants to apply for FP2016, they will need to stop contributions or stop accruing benefits with effect from 6 April 2016.
Paul pointed out to the paraplanner that Jeremy had ceased accrual some years ago and had paid no further contributions. Indeed, Jeremy had told Paul he is now employed by a small gardening company, which has just written to him to say it is going to auto-enrol him into a workplace pension scheme and Paul had advised him that if he does pay a contribution to a workplace scheme, he will invalidate any protection, so it is imperative for him to opt out before any payments are made.
The paraplanner continued “but what about the date?”
Paul looked relaxed and pointed out to the paraplanner that he had read that no paper protection certificate will be issued by HMRC for FP2016 and IP2016 and no application deadline exists. Applications for both FP2016 and IP2016 will be made online to HMRC and the process will open in July 2016. Should Jeremy want to take his benefits before July, there is an interim process whereby he can write to HMRC to get temporary protection until the online application process is available. A protection reference number will be provided by HMRC and this number will need to be given to a pension scheme by an individual each time benefits are being taken where FP2016 is held if they want to rely on the protected LTA.