As with previous reductions the opportunity will be available for individuals to protect their lifetime allowance, however stringent conditions will apply as in previous rounds of protection which may not be appropriate for all individuals. For those who are willing to forgo future pension provision in favour of retaining the current allowance of £1.25 million, Fixed Protection 2016 will be available and for those who have pension funds in excess of £1 million and wishing to continue to fund their pensions Individual Protection 2016 will be available.
The protection route might not be for everyone, so what other options are available to individuals?
Those who are over the age of 55 have other options. If their pension schemes allow it, they can crystallise benefits using the current lifetime allowance and still make further contributions in future.
Defined Contribution Schemes
For individuals with pension savings under £1 million who remain keen to continue pension funding to retirement but who have concerns about breaching the lifetime allowance the option of crystallising benefits now could be considered. By taking the 25% pension commencement lump sum (PCLS) and placing the rest in flexi-access drawdown with no income, the lifetime allowance test would be based on the current allowance of £1.25 million. For example, an individual with a pension fund of £900,000 would use 72% of their lifetime allowance this tax year. In this example this would leave at least £280,000 (28% of £1 million) available for future funding. As individuals face a further crystallisation event at age 75 it will be important to ensure growth in drawdown will not trigger a tax charge in the future.
In this scenario care needs to be taken prior to crystallisation
to ensure that exit penalties are not triggered by a switch into
Drawdown or that Guaranteed Annuity Rates/Protected PCLS are lost
as a result of transferring. Consideration must also be given
to a suitable home for the PCLS drawn, however the ability to
continue funding a pension may make this worthwhile.
Defined Benefit Schemes
For members of defined benefit schemes who can estimate that there pension benefits will take them over the lifetime allowance at the Normal Retirement Age, they could consider becoming a deferred member and applying for Fixed Protection 2016 and forgo further accrual. However an alternative option might be for them to consider drawing pension benefits early with a reduced annual pension, and, should the option be available, join their employer's defined contribution scheme to continue funding a pension in that manner. They could use some of their annual pension realised, and if available to them, the carry facility to make substantial pension contributions, particularly as the Defined Benefit pension does not trigger the money purchase annual allowance of £10,000.
These scenarios illustrate the potential benefit of commencing pension crystallisation whilst still working to allow further pension funding. However, individual and tax circumstances need to be carefully considered to ensure suitability.