Protect and serve?02 February 2016 Back to results
Ten years on from A-day and the standard lifetime allowance (SLA) will fall to £1m from 6 April 2016, almost half of its peak level in 2010/11 and 2011/12. From 2018/19 it will grow by the annual rate of any Consumer Price Index (CPI) increase rounded up to the next £100. Assuming CPI averages 2.5% per annum it could take 10-11 years for it to recover to its present level.
The Government estimates 55,000 people will be affected having existing savings between £1m and £1.25m in April 2016. This underestimates the full impact as many younger clients with lower funds may be affected in future due to ongoing contributions and investment growth.
Is your client likely to be affected?
For example, an individual holding £650,000 or more in pension savings today may be at risk of breaching the (growing) SLA in around ten years if they achieve a 6% investment return over the period. If time periods are longer or additional contributions are intended then the current value of those who may be affected will be even lower.
The main factors in determining if a client is likely to be affected, and the action they may take as a result, are:-
- What’s the current value of their pension savings?
- When are benefits to be taken?
- What investment return is likely to be achieved during the period (for those with defined contribution (DC) savings)?
- How much control, if any, do they have on their remuneration package – for example, if future contributions stop will their employer pay a level of compensation instead?
Determining the current value of pension savings is an area where clients will inevitably need help. It may be straightforward to gather current values of uncrystallised DC savings, though less routine perhaps if funds are held in a SIPP or SSAS with investment in commercial property. Those holding benefits in a defined benefit (DB) scheme will need to seek the value of their accrued pensions as at 5 April 2016 and use published factors to place a monetary value on these benefits. Trickier still will be valuing benefits that have already been taken, where complex (and separate) valuation rules apply for benefits already in payment on 5 April 2006 and benefits taken since then.
Once the current value is determined and the possible future value estimated, those affected will have the option of two new forms of transitional protection:
- fixed 2016 protection
- individual 2016 protection.
New protection options
Broadly, fixed 2016 protection will safeguard an SLA of £1.25m in return for no further contributions or benefits accrued. This will be available regardless of the existing level of pension savings, provided the client does not already hold primary, enhanced or any of the previous fixed protections.
Individual 2016 protection will only be available if the value of pension savings on 5 April 2016 is greater than £1m and will give an SLA equal to the actual value of benefits at that point, subject to a ceiling of 1.25m. This protection will be available provided the client does not already have primary or individual 2014 protection, but it can be held as a backup to some other protections.
The two new additions bring the total of transitional protections available to seven. It’s essential to be familiar with each, as the tax consequences of failing to register where suitable, or in losing protection, can be significant. A comparison document outlining the new and existing protections can be found here.
Regrettably HMRC has confirmed the registration process will not be fully operational for a few months. A new digital online system, which is currently being built and expected to be available from July 2016, will issue a reference number (as opposed to a certificate) that the client will use to confirm their entitlement to protection.
The delay is disappointing and may cause problems, perhaps with clients failing to stop contributions by 5 April 2016 and being ineligible for fixed 2016 protection as a result. Other individuals may be forced to follow an interim process to obtain a temporary reference number if they plan to take benefits shortly after 5 April 2016 and register again for a permanent reference number once the new system is available.
The latest reduction in the SLA provides a range of advice issues including:
- Identifying clients who may be affected
- Suitability of the new protections
- Process of registration and retention.
It also impacts those with:
- protection relating to pension credits, periods of non-residence and transfers from recognised overseas pension schemes
- scheme specific PCLS
- benefits payable on death before age 75, whether by income or lump sum.
Many clients (and possibly their legal personal representatives) will need specialist advice in each of these areas. Any client review may provide a final opportunity for some to consider a maximum funding exercise before applying for protection and the need for advice on savings and investment alternatives if further pension provision is no longer possible.