Future Lifetime Allowance levels.

The Lifetime Allowance (LTA) will reduce from £1.8m to £1.5m on 6 April 2012.  Many benefit limits are based on the increase in the LTA and have been underpinned at the £1.8m level, at least until such time as the LTA rises back above £1.8m.  For instance, it has been confirmed that the trivial commutation lump sum limit of 1% of LTA will remain at the present level of £18,000.

Additionally, individuals who have already made pension saving decisions based on the existing LTA can apply for ‘Fixed Protection’ and by so doing will retain the LTA of £1.8m.  Notifications must be received by HMRC on the prescribed form by 5 April 2012.  There is no minimum fund value to register but all future pension accrual must cease i.e. no further pension contributions can be paid.  The only exceptions are NI rebates, where the individual has contracted-out (contracting-out is being abolished in April 2012), and the payment of premiums to pension life assurance that started before 6 April 2006.  Your clients will also have to actively ‘opt-out’ within one month of being auto-enrolled (from October 2012) to avoid inadvertent pension accrual.

Fixed Protection is not available to those who have already registered for Primary or Enhanced Protection (which will continue unaltered), although it may be possible for those with Enhanced to relinquish this before they register for Fixed Protection.  This action must not be undertaken lightly, as it will restrict the level of protection to £1.8m, whereas under Enhanced Protection there is no upper limit and Lifetime Allowance charges can arise up until age 75.

There is currently an anomaly between the maximum Pension Commencement Lump Sum (PCLS) benefit that can be provided and although the draft legislation for Fixed Protection underpins the LTA to the higher level of £1.8m, it does not do the same for Enhanced Protection.  So, if your clients have this type of protection without the added benefit of protected cash, their PCLS benefit of 25% of fund value will be restricted to 25% of LTA.  And, if your fund value exceeds £1.5m, the maximum amount of PCLS that can be paid from 6 April 2012 will be restricted to £375,000 (25% of £1.5m LTA) rather than the £450,000 (25% of £1.8m LTA) maximum that applies until 5 April 2012.