The Lifetime Allowance is the total value of all pension benefits you can have without triggering an excess benefits tax charge. From 6 April 2016 the Lifetime Allowance limit will be reduced from £1.25 million to £1 million.
The reduced Lifetime Allowance of £1 million will not impact on the majority of LGPS members as their pension benefits will be well within the limit; for Lifetime Allowance purposes a pension taken from the LGPS now is valued at 20 times its annual value and a pension lump sum at the value paid, so an annual pension of £50,000 with no lump sum would have a value of £1 million, as would an annual pension of £37,500 taken with a lump sum of £250,000.
Given this reduction two new protections will be introduced from 6 April and will be known as Fixed Protection 2016 and Individual Protection 2016.
Please note – you will lose Fixed Protection 2016 if you are an active member of the LGPS or contribute to any other registered pension scheme on or after 6 April 2016. Therefore, members wishing to apply for, and keep, Fixed Protection 2016 will need to opt out of the LGPS and cease membership before that date and make no further pension savings to any registered pension scheme.
If your employer is going through automatic enrolment and they auto enrol you back into the LGPS you will have to again opt out within 3 months if your wish to keep either Fixed Protection 2012, Fixed Protection 2014, Fixed Protection 2016 or Enhanced Protection.
HMRC have introduced a new online self-service for you to apply for protection, the new online system went live in July 2016. You will need to make a full online application so that your pension savings can continue to be protected against the Lifetime Allowance tax charge.
The Local Government Association fact sheet below gives you more information on Lifetime Allowance and how it may affect you:
Annual Allowance is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge.
The Annual Allowance limit is currently £40,000. Most people will not be affected by the Annual Allowance tax charge because the value of their pension saving will not increase in a year by more than £40,000, or, if it does they are likely to have unused allowance from previous years that can be carried forward.
For the tax year 2016/17 the Annual Allowance will be tapered for members who have a ‘Threshold Income’ in excess of £110,000 and ‘Adjusted Income’ in excess of £150,000. For every £2 that your ‘Adjusted Income’ exceeds £150,000 your Annual Allowance limit will be tapered down by £1 (to a minimum of £10,000).
From 6 April 2016, Pension Input Periods for all pension schemes will be aligned with the tax year – 6 April to 5 April. The Pension Input Period is the period over which your pension growth is measured. Up until 2014/15 the Pension Input Period in the LGPS ran from 1 April to 31 March. As a result special transitional arrangements apply for 2015/16 meaning there are two Pension Input Periods in place with different amounts of Annual Allowance.
For a full definition of ‘Threshold Income’ and ‘Adjusted Income’ and more information on Annual Allowance, the two Pension Input Periods and how they may affect you please see the Local Government Association fact sheet below:
Pensions Tax Changes Newsletter