Home Resettlement Personal Finance The Life Time Allowance is Reducing Again. Look Out: You Might Need Protection!
|The Life Time Allowance is Reducing Again. Look Out: You Might Need Protection!|
The Life Time Allowance threshold (the maximum amount of money you are allowed to have in pension funds before you become liable to a tax charge) is about to change again on 6th April 2014 in a downward movement from £1,500,000 to £1,250,000
Will this affect you? Do you know how to calculate the value of your Armed Forces pension for Life Time Allowance purposes? What methods of protection is the HMRC offering this time around if you believe that protection is something that is right for you? The Forces Pension Society helps unravel some of the complexities surrounding this tricky subject for those who might find themselves wrapped up in its tentacles...
The first thing you need to do to ascertain whether this issue will affect you or not, is to calculate the value of your pension for the purposes of discovering if you have incurred a Life Time Allowance (LTA) tax charge.
As far as the Armed Forces pension schemes are concerned this is a simple exercise conducted by multiplying the annual pension you are due to receive by 20 and adding the lump sum. Let us take an example of a Sergeant leaving on the AFPS75 pension scheme after 22 years’ service with an annual pension of £10,661. Multiplying £10,661 by 20 = £213,220 and adding the lump sum of £31,983 to that answer gives us a total value of £245,203.
This is not an insignificant amount of money, but in the case of the Sergeant it can be quickly seen that, as far as he or she is concerned, the value of their pension is nowhere near close to the new LTA threshold of £1,250,000; they still have the ability to have just over £1m in value of additional pensions after leaving the Armed Forces before coming close to the new threshold. Realistically, therefore, the Sergeant does not need to worry about taking any form of protection against the LTA change that might be open to them.
However, the same might not be said in the case of more senior personnel leaving with a greater pension value. What forms of protection are available to those who might breach this new threshold? First there is a form of protection called ‘fixed protection’. Fixed protection does pretty much what it says on the tin – it fixes your LTA threshold at the current level of £1.5m (regardless of the value of your pension on the date of the change) prior to the reduction to £1.25m on 6th April 2014.
However, before you rub your hands with glee in the belief that this would be a jolly good idea anyway, be aware that fixed protection comes with a sting in the tail. If you take fixed protection you cannot accrue any additional value in any pension scheme (apart from the State Pension scheme) from the 6th April 2014 onwards; if you do you immediately lose that protection and could be liable for an instant tax charge, and in the case of the Armed Forces pension schemes, this means you will have to leave your pension scheme as an active member at that point.
For some people, taking fixed protection might be a sensible thing to do in terms of not wishing to accrue any additional pension value, particularly if you have already reached the ceiling of maximum pensionable service the pension scheme will allow, and so all future service is not going to be pensionable anyway (for example: a Vice Admiral, aged 57 with 34 years’ pensionable service on the AFPS75 scheme, who would earn a pension of approximately £68,000).
But if you are a member of the Armed Forces pension scheme and you have to leave it, unlike the deal struck in 2012 where such individuals opting for fixed protection remained covered for Death-in-Service benefits and Ill-Health benefits, it is most likely that on this occasion you will not continue to enjoy any such cover, and given the environment the Armed Forces operate within, that could be a very risky decision.
For example, four times Death-in-Service lump sum for a full Colonel on the AFPS05 pension scheme is around £352,000 – how much would it cost in premiums to insure your life for that sum through commercial means? That said, taking fixed protection is a judgement call that the individual must make for themselves – as long as it is being made with all the known facts and consequences to hand.
If fixed protection is not right for the individual, what other options are available? In 2012 there were none, but this time around the HMRC is introducing a second form of protection called ‘individual protection’. Individual protection can only be taken if, on 6th April 2014, your pension value is at a rate equal to £1.25m or more. In essence, what individual protection does is allow you to protect your individual pension value and set your personal threshold at the value your pension holds on 6th April 2014, up to a maximum of £1.5m. For example, if you have a pension value of £1.352m and you opt for individual protection, you set your personal LTA threshold at £1,352m.
However, the greatest and most significant difference between fixed protection and individual protection is that with individual protection you will be permitted to continue accruing more value in a pension fund after 6th April 2014, although you will do so in the knowledge that every additional £1 above your new personal LTA threshold will incur a LTA tax charge. That said, there is no tax charge set at a rate of 100%, so you will always get something back in additional pension that would not have been an entitlement if you had taken fixed protection and left the Services with pension accrual only to 6th April 2014.
One section of the Armed Forces who may wish to look seriously at taking fixed protection, even though their pension does not currently value at a rate that is as high as £1.5m, are those who leaving the Services shortly, under the AFPS05 pension scheme, and are doing so close to their 55th birthday and are expected to be paid an Early Departure Payment income stream and a lump sum on exit. Remember, those leaving in such circumstances are not leaving with a pension; the pension and lump sum earned are not payable until you reach age 65.
Between leaving and reaching age 65 these benefits are going to increase in value via the CPI and pensions are not assessed for a LTA tax charge until they come into payment. Therefore, it is possible that in the intervening period between leaving and reaching age 65 the value of the pension could have exceeded the new LTA threshold of £1.25m and you will become liable for a tax charge when, on exiting the Armed Forces, you did not. Furthermore, there is nothing to say that the LTA threshold might not reduce even further, to say £1m, and if that is ever proposed before your pension comes into payment you might suffer a nasty tax bill you had not bargained for if you are not keeping a beady eye on such matters.
If you want to know the value of your pension or if you have any other questions about your Armed Forces pension and you are a member of the Forces Pension Society, you can find answers by looking at the Society’s web site or by calling the dedicated help line on 020 7735 0110. If you are not yet a member, the cost is modest and benefits (in addition to advice from an expert) include numerous discounts on a range of useful products and services and the assurance that a dedicated organisation, independent of the Government, is there to help you get the most from your Armed Forces pension.
For more information, go to www.ForcesPensionSociety.org
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