Members of pension schemes in the UK enjoy tax relief on the contributions that they pay and are also able to draw part of their retirement benefits as a tax-free lump sum on retirement. There is however a limit to the maximum tax advantaged benefit members can build up in total – known as the lifetime allowance (LTA). From 6 April 2014 this threshold will reduce from £1.5 million to £1.25 million.
In addition to the above change the Annual Allowance (AA) will be reducing from £50,000 to £40,000 from 6 April 2014. This measures the increase in the value of your benefits in a pension input period (usually April to March). Any excess benefit will be taxed at your highest marginal rate.
The changes highlighted will affect mostly the high earners in USS and NHS. Saul members are least likely to be affected by the changes in April 2014.
USS members who are likely to be affected recently received an information pack informing them to review their position and seek independent financial advice. NHS members who are earning in excess of £100k and have long service will need to review their position and seek appropriate financial advice.
HMRC has introduced two new options for members to help reduce the impact of the reduction to the LTA. These are:
- Individual Protection 2014 – HMRC has confirmed that members whose benefits for LTA purposes are on excess of £1.25 million as at 5 April 2014 will be able to apply for this protection. It will secure a LTA equal to the member’s benefits as at April 2014 up to a maximum of £1.5 million. Applications are open until 5 April 2017 however the application forms are unlikely to be made available by HMRC until summer 2014.
- Fixed Protection 2014 – This protection will secure a LTA for the member at £1.5 million irrespective of the value of his/her benefits as at April 2014. However, it is likely that pension accrual will have to cease to avoid the election being lost. Elections must be received by HMRC before 6 April 2014.
Affected members are requested to seek independent financial advice before making any decisions about your benefits or HMRC protection. Monitoring AA and LTA liabilities, like any other personal tax matter, is an individual’s responsibility.
Below is a link to the USS website which provides more information about the issues. NHS members can also benefit from this information but note that the options available under each scheme can be different: