The use of large up-front fees and disproportionate deposits has already resulted in significant cost consequences for one care provider.
HMRC have now published details of how savers can apply for protections so that they will be able to continue to benefit from a lifetime allowance of £1.25million so long as they cease to accrue pension benefits. With the reduction less than a month away, individuals who may be affected should carefully consider whether they need to apply for protections. As employees will need to stop accruing further benefits in order to keep one of the protections, employers may also want to consider alternative forms of remuneration for these employees.
There are 2 forms of protection available to individuals to enable them to keep a lifetime allowance of £1.25 million. These are known as Individual Protection 2016 and Fixed Protection 2016. There is no particular deadline for applying for these protections but applications before 6 April 2016 will not be processed and will be discarded. HMRC will be introducing an online system for registering for the protections and which is expected to be available from July 2016. Individuals will need to apply to HMRC for a reference number before they take any pension benefits.
If individuals propose to take benefits before the online system is available, they will need to apply to HMRC in writing for a temporary reference number and then make a full online application in July 2016. HMRC has helpfully provided some template wording for interim applications here.
In order to apply for Individual Protection 2016, it will be necessary for individuals to provide HMRC with details of value of their accrued benefits on 5 April 2016. This will need to be broken down. Individuals will therefore need to liaise with their pension scheme(s) in order to get details of their benefits so that they can apply for Individual Protection 2016. In practice this means it won’t be possible to apply for protection until after 6 April.
Similarly for Fixed Protection, it will be necessary to make a declaration that as at 5 April 2016, they did not have any other form of protection. Fixed Protection requires that individuals will need to ensure that no further contributions are made after 5 April 2016 in a money purchase arrangement, and that there is no further benefit accrual in a defined benefit arrangement. This is likely to mean that the individual will need to opt out of further benefit accrual before 6 April 2016.
These changes mean that employees with a pension pot of £1 million or more face either opting out of their pension schemes or paying tax at up to 55% on pension savings above the allowance. This has led employers to reconsider the benefits that they provide and some employers are providing compensation by way of increased remuneration in lieu of pension benefits for those affected.
For more information
If you would like to discuss how the lifetime allowance might impact on the benefits that you offer to your staff, please contact Doug Mullen.
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