Individuals whose total pension funds and entitlements (including pensions from their current and all former employers and their personal pensions) are substantial should take urgent personal advice relating to their ‘lifetime allowance’.

Pension trustees may be required to value individuals’ pension funds to help them assess the value of their total pension pot. The concept of a lifetime allowance (LTA) for the total value of an individual’s pension fund was introduced in 2006. A penalty tax is charged on pension funds that exceed the limit (currently £1.8m) when the individual first draws any benefits (the vesting date). The LTA limit is scheduled to reduce to £1.5m from 6 April 2012.

However, the Government has put some transitional protection rules in place for individuals whose pension funds are likely to exceed the £1.5m limit – provided affected individuals formally elect for ‘fixed protection’ before 6 April 2012.

When the LTA was introduced in April 2006, individuals with large pension pots could apply for primary or enhanced protection depending on their circumstances and the values of their funds. Individuals can opt for fixed protection of the £1.8m current lifetime limit under the new rules in a similar way as enhanced protection operated from ‘A day’, with the following consequences:

• it is not necessary for an individual’s fund to exceed £1.5m at 5 April 2012 for the fixed protection election to be made, but

• protection will end if further contributions are made by or on behalf of the individual after 5 April 2012 to a money purchase scheme or where individuals in defined benefit schemes accrue further pension benefits in the current scheme in excess of a specified percentage.

It is to be noted that fixed protection will not be available to anyone already holding full or deferred primary protection. A charge under the LTA rules at 55% of the excess over £1.8m for a lump sum entitlement and 25% for a pension entitlement will continue to arise at the time the pension vests. The charge may also arise at other later ‘benefit crystallisation events’ for individuals who opt to take a drawdown pension – in particular on reaching age 75.

This technical update comes courtesy of our strategic partner PKF(UK) Ltd.