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Q&A: Protection from the lifetime allowance charge (LTA)

Q. What is the lifetime allowance charge?

There is a limit on the lifetime value of pension savings for each individual which is known as the lifetime allowance (LTA). If pension savings exceed this limit then tax is charged on the excess when benefits are drawn. Any excess amount over the LTA taken as a lump sum is taxable at 55%. Any excess amount over the LTA taken as a pension income is taxable at 25%.

The LTA is currently £1.5 million but the Government announced in December 2012 that this would be reduced to £1.25 million on 6 April 2014.

To provide some relief for individuals who may have built up pension savings in excess of £1.25 million, the Government announced in the 2013 Budget that they would introduce an individual protection regime.

Q. Should I apply for individual protection?

The LTA is only an issue for GPs with significant NHS pension rights and/or with large personal pension funds. If you don’t have any private pensions, then to exceed the £1.25 million LTA your NHS pension would need to exceed £54,000.

Q. What are the benefits of getting individual protection?

Individual protection (IP2014) will give individuals a personalised LTA equal to the value of their pension savings at 5 April 2014 up to a maximum of £1.5 million. Thus more tax relief will be available to individuals with IP2014 than the £1.25 million LTA that would otherwise apply.

For example, Dr A wants to know whether IP2014 will be of benefit to him. He estimates that he will have revalued career earnings of £3.5 million at 5 April 2014 which would entitle him to a pension of £49,000 plus a lump sum of £147,000. He also has a private pension policy which he expects to be worth £250,000 at that date. The lifetime value of his pension rights at 5 April 2014 is:

NHS pension£49,000 x 20980,000
NHS lump sum 147,000
Private pension 250,000
Value of pension savings 1,377,000

As this exceeds £1.25 million, an election for IP2014 will be beneficial as it will create a personal LTA of £1,377,000.

Q. How does this compare with fixed protection?

Fixed protection (FP2014) entitles individuals to an LTA of £1.5 million, but individuals are not allowed to increase their pension savings after 5 April 2014 or FP2014 is lost. This means that to retain FP2014 status individuals normally have to become deferred members of the NHS Pension Scheme, and stop contributing to this or any other scheme. Under IP2014 individuals can remain active members of the NHS Pension Scheme.

Q. Are there any downsides to applying for IP2014?

Some members have other forms of protection dating back to 2006 known as ‘primary protection’ and ‘fixed protection’. These individuals will be prevented from applying for IP2014 as their existing protections are more advantageous.

There will be a minor administrative burden in making an application for IP2014, as it will be necessary to obtain a value of NHS pension savings, and any other pension rights as at 5 April 2014. Only individuals with rights in excess of £1.25 million will be able to apply.

When do I have to make the application?

It will not be possible to make the election until after 5 April 2014, because of the need to value the rights as at that date. The proposal is that there will be a three year period for submitting applications, so the final date will be 5 April 2017.

This is very different from FP2014 when the election needs to be made no later than 5 April 2014.

What now?

Note that as this briefing is based on a consultation document, changes may be made before the legislation is enacted in the Finance Act 2014 that could affect the advice given in this document.

If you require any further advice in considering your pension position speak to a specialist medical accountant or financial adviser.

Luke Bennett is a partner at Francis Clark LLP, who are members of the Association of Independent Specialist Medical Accountants