Pension savers that are at risk of breaching the lifetime allowance can now apply for protection through a new HMRC portal.
The lifetime allowance (LTA) is the maximum savers can hold in a pension and still enjoy tax relief on contributions. Following a reduction from £1.25m in April, the LTA now stands at £1m and includes both contributions paid in and investment growth. A 55% tax penalty is charged on any pension savings in excess of the LTA.
It is not just the highest earners that will be caught out by the reduced allowance, middle managers with long service history in a good final salary scheme could also be hit.
The protection offered by HMRC enables savers to carry on benefiting from the previous £1.25m allowance but restrictions apply.
Matthew Brown, private client partner at Thomas Miller Investment explains: “The new HMRC web portal that allows pension savers to protect a pensions Lifetime Allowance (LTA) of more than £1m is up and running. The web portal allows anyone to apply for Fixed Protection 2016 (FP16) and secure a £1.25m LTA in return for no further pension contributions.”
He continues: “The portal also allows applicants to apply for Individual Protection 2016 (IP16) to protect the value of their pension at April 2016 up to £1.25m while still continuing to contribute. Pleasingly, the website is relatively straightforward and easy to navigate.”
However, there are certain pitfalls that applicants need to be aware of. One is that if you applied for protection in the interim period after April and before the portal was launched you will have received a temporary number. This needs to be converted to a permanent number, which can be done by logging onto the portal.
It can be accessed through Gov.uk.
Although there aren’t any fines for failure to do this, it could delay matters once you come to access your cash.
There may also be implications if you have death in service benefits (employer-sponsored life cover) because they are written under pension trusts. Depending on the way your arrangement is written it may cause you to breach the terms of fixed protection so it is worth discussing the matter with your HR department if you go down this route.
It is also important to note that if you carry on paying into your pension once you have applied for fixed protection you must notify HMRC within 90 days. The taxman charges a £300 penalty for failing to notify it, followed by further penalties of £60 a day until the situation is resolved.
There is no application deadline.
Finally, if your pension was valued in excess of £1.25m you may still be eligible for individual protection from 2014. This would enable you to protect an allowance of £1.5m but you must apply before 5 April 2017 (you can do this via the same tool linked to above).