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Protecting your life savings with FP14 and IP14
HM Revenue and Customs (HMRC) recently announced plans to further reduce the standard lifetime allowance for pensions in 2014 from £1.5 million to £1.25 million. The standard lifetime allowance is the maximum permitted amount of tax-exempt fund an individual can build up in pension savings. In 2012 it decreased from £1.8 million to £1.5 million.
Fixed Protection 2014
Fixed protection 2014 has followed the principles set by previous reductions, with the standard lifetime allowance being reduced to £1.25 million on the condition that no further contributions are made to any pension plans or any further benefits accrued. There are also restrictions on how and where the benefits can be transferred whilst maintaining this protection.
The new allowance will apply from 6 April 2014, and an individual can currently protect to retain the standard lifetime allowance at £1.5 million. The forms are available from HMRC, and to ensure these qualify, the completed forms must be received by HMRC on or before 5 April 2014.
Individual Protection 2014
On 10 June 2013, HMRC proposed that an individual with funds over £1.25 million on 5 April 2014 will be able to protect the lower of that value (personal lifetime allowance) as at 5 April 2014 or £1.5 million.
The difference is that contributions and/or accruals can continue although this may result in tax charges if the value when benefits are taken is higher than the protected amount. It is expected to receive Royal Assent in summer 2014; therefore, the relevant forms are not yet available. As the valuations will take time to be obtained, it is expected that individuals will have until 5 April 2017 to apply.
We have compiled a list of questions to help explain the changes in legislation and how your clients may be affected.
You are not able to apply for the new forms of protection if you hold either enhanced or primary protection without first revoking it. As these earlier forms of protection are more generous, it is unlikely that this will be beneficial to you.
Your benefits will never be tested against the lifetime allowance therefore you will not be affected.
This may affect you, as fixed protection 2012 secures the higher amount of £1.8 million but doesn’t let you contribute again. In certain scenarios, such as where your fund may fall in value during the interim period of 2012, or when taking benefits, you may wish to contribute. Individual protection would give you the opportunity to do this whilst maintaining your personal lifetime allowance or £1.5 million, whichever is the lowest.
As well as it being a safety net against falling fund values, it helps those who are eligible for employer contributions for which a cash alternative is not available. Individuals can still protect their personal lifetime allowance or £1.5 million, whichever is the lowest, whilst accruing benefits. As stated earlier, these accruals may lead to tax charges later.
You can hold fixed protection 2014 and individual protection, but you cannot apply for them at the same time. If your fund falls in value you may wish to contribute to bring it back to your personal lifetime allowance or £1.5 million, whichever is the lowest.
Without a valuation of the property you will not know the value of your pension fund in order to establish whether fixed protection 2014 or individual protection is appropriate. You will not be able to apply for individual protection unless you have the property revalued to establish how close you are to the £1.25 million allowance. It may be time to consider a revaluation.
Should you feel individual protection is appropriate you should consider obtaining a valuation of your pension fund as at 5 April 2014. There may be cost implications therefore we recommend you speak to your usual pension adviser. We suggest you obtain a current valuation, as in our experience, it is always more difficult if you try to obtain a historic valuation.
Whether the lifetime allowance will fall further or rise is impossible to predict, as it is dependent on what future Governments choose to do. If you are likely to be close to the £1.25 million on taking benefits and do not wish to contribute, or accrue further benefits, fixed protection may be a worthwhile option. Should your fund fall short of the lifetime allowance on taking benefits you can always revoke the protection by contributing – your only loss may be the cost of the advice you receive.
This is based on our understanding of the detail and implementation of the individual protection regime at the time of writing. Final details are expected to be published in the autumn and these will be included in the Finance Bill 2014.
If you have any further questions about fixed protection, please contact Kerry Houghton on 01772 550614 or email Kerry.Houghton@taypat.co.uk.