Changes to the Annual and Lifetime Allowance – are you ready?
Published on 16th Dec 2015
What is changing?
At the moment, the Lifetime Allowance is £1.25 million. From April 2016, it will reduce to £1 million.
The Annual Allowance is also changing. At the moment, it is £40,000. From April 2016, a reduction will apply for anyone whose income exceeds £150,000 (including pensions contributions) or £110,000 (excluding pensions contributions). Their Annual Allowance will be reduced by £1 for every £2 by which their income exceeds the threshold, subject to a maximum reduction of £30,000. To support this change, pension input periods are being reset. From April 2016, all pension input periods will be aligned with the tax year. Transitional provisions apply this year. Pension input periods open on 8 July 2015 (Budget day) were closed on that date and a second pension input period (to run from 9 July 2015 to 5 April 2016) was opened.
What do scheme trustees need to do?
If the Annual and/or Lifetime Allowances are exceeded, tax charges apply. As such, it is important that members are aware of these changes, of the need to take financial advice if they think they might be affected and of the basic options available to them.
The options available to a member who is likely to exceed the Annual Allowance will usually depend on the flexibility in relation to contributions/accrual in the Scheme Rules and any alternatives their employer offers. We suggest that trustees and employers discuss the change to the Annual Allowance and agree how to proceed and communicate the change to members.
The options available to a member who is likely to exceed the Lifetime Allowance will depend on similar considerations and so we suggest a similar approach. Although schemes must not provide financial advice, members will find it helpful to have some information about the protections against the change to the LTA that will be available. These are fixed protection 2016 and individual protection 2016. To help schemes to communicate with members, HMRC’s December newsletter includes a suggested message to scheme members (set out in appendix 1) which it invites schemes to use. We can assist with providing more scheme specific wording for this communication. HMRC’s newsletter also explains that members will need to apply for protection using a new on-line system and the interim arrangements that will apply on retirement between April 2016 and July 2016 (the date the on-line system is expected to be available to use).
Please find a link to the newsletter here: HMRC pension schemes newsletter 74 – December 2015.
