LTA Cut - Decision time

 

The reduction in the Lifetime Allowance (LTA) is approaching, which means decision time for individuals who may be caught by the LTA reduction from £1.25 million to £1 million in April 2016.  Should you stick or twist?  The price for protecting your pension against the LTA charge and securing protection at the £1.25 million level, may be that you need to stop pension funding.

There is no deadline for fixed protection 2016 (FP2016) or individual protection 2016 (IP2016), however FP2016 means pension contributions must stop after 5 April 2016.  If you are in a position where you will require protection, you only have a few weeks to decide whether to increase pension funding and build a bigger pension pot to protect.

  • For individuals choosing FP2016, the next few weeks is the final opportunity to fund your pension.
  • Those considering IP2016 may want to increase funding to boost the protected LTA.

Individuals looking to use FP2016  to lock into a £1.25 million LTA, will need to think about how they stop pension funding by the 5 April 2016 deadline:

  • Ceasing contributions or opting out of any future Final Salary scheme funding often requires at least one months notice to the employer.
  • Business owners who pay single contributions will have more time and by maximising contributions before 5 April 2016 they can leave their options open a little longer.

Individuals affected will still need to save for retirement and they need to consider the best place for their savings.  This could still be their pension, even if it means paying an LTA charge.  Individuals will need to consider whether carry on funding and paying an LTA charge will give you more in their hand than the protected pension fund plus other savings outside a pension.

FP2016 might mean the LTA charges are avoided or limited by having protection at the higher LTA of £1.25 million.  However an additional pound of contributions or additional accrual into a Final Salary scheme after 5 April 2016 could result in protection being lost and a being applied.

It's only natural to think tax charges should be avoided, especially one designed to cap pension funding.  It is always important to weigh up all the options available and please contact us for further information.