We’re starting to see an increasing number of our clients aged 55+ getting caught up with the pension lifetime allowance. It can be a bit of a minefield.
There’s no limit on the benefits you can receive (‘crystallise’) from a registered pension scheme. But the lifetime allowance effectively limits the maximum tax-efficient value of all your pension benefits.
The lifetime allowance was introduced in April 2006 as £1.50m. It’s been reduced on three occasions, bringing it down from £1.8m in 2011/12 to £1.0m in 2016/17.
For the current 2019-20 tax year it’s £1,055,000.
Every time the lifetime allowance has been cut there’s been an option to register for a ‘fixed protection’ option. This allows you to retain the existing allowance. So, for example, the 2012 version of fixed protection allowed the £1.8m lifetime allowance to be retained.
However, there was an important condition attached to all these fixed protections: they are lost if any additional contributions are made or any benefits are increased beyond the pension scheme’s normal indexation rules.
So at worst, an extra £1 of pension could see a fixed protected lifetime allowance of £1.8m reduced to the current standard lifetime allowance of £1.055m. In an extreme case, that could create an extra tax liability of over £400,000!
In theory the restriction means anyone with fixed protection should studiously avoid any risk of falling into that extra pension trap. In practice, some people – particularly the non-advised – forget or are unaware of the pitfall.
Now there is another potential danger, even for the diligent.
An arcane 2018 High Court ruling on how to deal with equalisation of certain state-related pension benefits from the 1990s threatens to make automatic small increases to the benefits of some members of final salary pension schemes. Potentially enough to tip some over the threshold.
The situation now is that:
- The law, as interpreted by the High Court, says these ‘GMP equalisation’ adjustments must be made.
- Many pensions schemes have been, or are in the process of, calculating what those payments should be; but
- Everything has gone on hold for fear of the tax consequences. HMRC has not issued any guidance on the matter and is still ‘carefully considering’ what to do.
If nothing else, the problem is a reminder that if you have any form of pension protection, it can be highly valuable and advice should always be sought before any changes are made.