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The lifetime allowance is the maximum value a pension fund can be at your nominated retirement date without the excess being subject to tax charges. From 6 April 2012 this allowance will be reduced from £1.8m to £1.5m, and individuals who expect the amount of their pension savings to be more than £1.5m by the time they take their benefits can apply for "fixed protection" by 5 April 2012.

Various conditions must be met in order to successfully obtain fixed protection, the key ones being:

  • Agreeing not to start a new pension arrangement (unless you are accepting a transfer of existing pension rights), and
  • Agreeing not to make further payments into a money purchase scheme.

To put this into context, an individual with a pension fund worth £1m at today's date who anticipates the fund to be worth £1.8m when the benefits vest would be subject to the following charges (based on current tax rates):

Without a claim for Fixed Protection

  • 25% Tax free Lump Sum / 75% Annuity
    £1.8m less £1.5m lifetime allowance = £300,000
    Lump sum excess - £300,000 x 25% = £75,000 x 55% immediate pension charge £41,250
    Annuity excess - £300,000 x 75% = £225,000 x 25% immediate pension charge £56,250
    Total charges £97,500
  • 100% Annuity
    £1.8m less £1.5m lifetime allowance = £300,000
    Excess x 25% £75,000
    Total charges £75,000

With a claim for Fixed Protection

As a claim preserves the entitlement to a lifetime allowance of £1.8m, there would be no pensions savings charges due when benefits are taken.

Needless to say, choosing whether or not it is appropriate to take fixed protection is a difficult decision and we have good relationships with independent financial advisers who specialise in this area. Those individuals who hold existing “primary” or “enhanced” pension protection will not be affected by the reduction to the lifetime allowance.

If you would like to talk to us about Fixed Protection Claims or any other tax planning opportunities in more detail, please contact us at the earliest opportunity.