Budget 2015: Lifetime allowance cut

Budget 2015: Lifetime allowance cutOne of the two big pension announcements in the Budget was a cut to the pension lifetime allowance.

The lifetime allowance will be cut from £1.25m to £1m from 6th April 2016.

This move is expected to raise £600m a year for the Treasury.

As a result, more people will face a tax charge on pension pots or benefits above £1m when they take their pension benefits or experience another lifetime allowance test, such as reaching their 75th birthday or transferring pension funds overseas.

George Osborne also confirmed that, from April 2018 onwards, the lifetime allowance will be indexed each year in line with price inflation, as measured by the Consumer Prices Index (CPI).

If the value of your pension pot exceeds the lifetime allowance, there is a tax charge to pay. The level of this tax charge depends on how you take your pension benefits.

The lifetime allowance tax charge is 55% if you take the excess pension pot as a lump sum, or 25% if you take the pension as a regular payment (which is also subject to income tax at your marginal rate).

If you die before taking your pension pot which exceeds the lifetime allowance, the person receiving benefits will have to pay the tax you owe.

The proposed cut to the lifetime allowance in the Budget to £1m might sound like it remains at a very high amount, but improving life expectancy means pension pots often need to last for thirty years or longer. Your £1m pension pot might not last as long as you expect.

When the lifetime allowance has been cut in the past, the government has offered a transitional protection regime to help protect people with existing large pension pots from experiencing a nasty tax surprise.

This has left us with several transitional protection regimes, all with their own rules:

  • primary protection
  • enhanced protection
  • fixed protection
  • fixed protection 2014
  • individual protection 2014

We might now expect to see fixed protection 2015 and individual protection 2015 added to this list, ahead of the lifetime allowance cut due next April.

If you have a larger pension pot or annual benefits from a final salary pension which, when multiplied by a factor of twenty bring you close to the £1m level, you should seek professional advice ahead of next April to ensure you are not paying tax on your pensions unnecessarily.



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