The Government has announced a change in the amount of benefit an individual may accrue under a registered pension scheme before the benefit is subject to tax. At present the Life Time Allowance (LTA) has been set at £1.5million but will decrease to £1.25million with effect from 6th April 2014. Any accrued benefit above the LTA (if paid as a lump sum) will be subject to a recovery tax charge which is currently set at 55%, this would be payable at the appropriate crystallisation event, such as the point of death. This would mean that the beneficiaries of the estate may be liable to settle any tax liability.
The changes mean an increased number of individuals will now have life benefits which are close to/above the LTA.
It is not only pension savings which count towards the LTA but also lump sum benefits associated with a registered life assurance policy (usually a company benefit). Spouses' death in service pension, which may also form part of a company benefit, would not.
Can I protect myself against these changes?
Where individuals already have significant registered pension benefits, HMRC is allowing individuals to apply for Fixed Protection, which if successful will mean that registered benefits up to £1.5million would not be subject to the recovery tax charge.
If individuals apply for Fixed Protection then they can no longer accrue benefits within a registered pension scheme, unless it is to receive a transfer of rights from an existing pension arrangement.
Applications for Fixed Protection can be made online via the HMRC website, before 6th April 2014.
An individual who already has Enhanced or Fixed protection relating to previous alterations to the LTA will not qualify. Additional information can be found at the following HMRC website: http://www.hmrc.gov.uk/pensionschemes/understanding-la.htm
Consider setting up an excepted approved life assurance policy
The life benefits under such policies do not count towards the LTA and can be linked to the current registered policy for costing and underwriting purposes. We would recommend that this is considered for all employees with significant lump sum benefits.
Excepted life policies are still written under trust but they are not required to be registered with HMRC and consequently fall outside of the regulation and tax treatment of registered pension schemes.
The following link to the HMRC website provides further detail: http://www.hmrc.gov.uk/manuals/iptm/iptm7025.htm.
Who do the changes affect?
It may not be obvious to an employer and/or Trustees, who may be affected by these changes especially if the benefit levels associated with the lump sum group Life policy are currently below the LTA.
New joiners should be asked if they already have Enhanced or Fixed protection in place. If these members are automatically included into a registered group life assurance policy they would potentially lose their protected status and this is particularly important when considering auto-enrolment (where members will have only a short window to optout).
Once protection is lost it cannot be put back in place.
How can Lockton help?
The employee benefits team can assist in reviewing the current benefit programme and offer advice on the most effective structures to accommodate those who are affected by the LTA.
For further information contact Chris Rofe (Employee Benefits, VicePresident) at firstname.lastname@example.org (telephone 0203 933 2876) or speak to your Lockton broker.