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Ongoing lifetime allowance enhancements and reductions

The lifetime allowance is one of many aspects of pension legislation that is getting ever more complex as we get further away from A-day in 2006. We are nearly 11 years on and it has gone up from £1.5 million to £1.8 million and now we are having to cope with a standard lifetime allowance of just £1 million. With this new reduction it is ever more important to understand any enhancement or reductions that can apply to this headline number.

The protections from the reduction in the lifetime allowance, such as fixed and individual protection, are clearly the most obvious adjustments to the standard lifetime allowance and will be the most common ones we will see. Currently, individual protection 2014, fixed protection 2016 and individual protection 2016 are available to those eligible, with individual protection 2014 applications closing on 5th April 2017. There is no deadline for individual and fixed protection 2016 but they should still be considered sooner rather than later to ensure that the client remains eligible and has the correct information to apply for protection.

Reduced lifetime allowances

There are only two sets of circumstances in which an individual would not be entitled to their full standard lifetime allowance. The most common is where they had benefits in payment before 6th April 2006, in which case their lifetime allowance is reduced to take account of these benefits. The reduction is calculated at the first point they take benefits after A-day, which means for those with increasing benefits in payment it is better to crystallise something sooner rather than later so less lifetime allowance is lost to this benefit. Many have crystallised a very small amount in order to ensure that future increases do not impact on uncrystallised funds. Although there is little that can be done now as the most recent reduction has already occurred it may be worth considering applying for fixed protection 2016, if eligible, and crystallising a small part using a lifetime allowance of £1.25 million. If they later lose fixed protection 2016 then the crystallisation will have been done using the higher figure and no recalculation will occur.
The other reduction in the lifetime allowance relates to those who have the right to retire before age 50 by virtue of a protected pension age. In this case the lifetime allowance is reduced by 2.5% for each whole year between the date they take the benefits and the normal minimum pension age, currently 55. For those who have the right to retire between age 50 and 55, there is no reduction applied so they would be entitled to their full lifetime allowance. Protected pensions ages stem from the rights some individuals had which, due to their profession, meant they could retire early, such as footballers, deep sea divers etc. Early retirement ages that are not protected pension ages are now only available to certain pension schemes, such as Armed Forces and Fire Fighters.

A-day enhancement factors

On the flip side of the reductions there are cases where enhancements to the lifetime allowance apply. There are two transitional protection enhancement factor - these are in relation to the change in the way benefits were tested at A-day. The one we all know about and deal with regularly is the primary protection factor. This was only available to those with benefits worth in excess of £1.5 million at 5th April 2006 and the factor gives you that amount extra lifetime allowance so a factor of 1, gives you one extra lifetime allowance.
The other transitional protection enhancement factor is a pre-commencement pension credit factor which gives an enhancement to those who have received a pension credit before 6th April 2006. This factor enhances the lifetime allowance by the value of the pension credit, increased by RPI to 5th April 2006. It should be noted that it isn't possible to have both a pre-commencement pension credit factor and a primary protection factor because the value of the pension credit would already have been taken into account in the primary protection calculations.

Current enhancement factors

There are three enhancement factors that can apply for today. The first is again in relation to pension credits and is called the "pension credit factor". This doesn't apply to all pension credits, only given after 5th April 2006 and that came into payment after this date but before the pension sharing order. The enhancement applies because the benefits have already been tested once and will be tested again when the receiving spouse chooses to take benefits.
The second enhancement is the recognised overseas scheme transfer factor, it applies to transfers into the UK from a recognised overseas pension scheme. There is a need to ascertain if the recognised overseas scheme includes any benefits have had UK tax relief since 6th April 2006. This amount is called the "relevant relievable amount" and relates to any contributions and accrual where the individual was a member of a recognised overseas pension scheme but was not a relevant overseas individual.
The third enhancement factor is also in relation to those working overseas but it relates to periods of membership of a UK registered pension scheme where the member is a relevant overseas individual. These individuals will not have received tax relief on the contributions or accrual but the benefits will count towards the lifetime allowance. This enhancement factor ensures they are not penalised for this period or periods of membership. The various periods can be aggregated over different periods of overseas employment.

Thoughts

The enhancement factors for some may be small and may not seem like they will be relevant in the future. However it isn't possible to tell what will happen in the future. To this end it is key that all applications are made in a timely fashion to ensure that all the details required to make the application for the protection can be easily sourced and deadlines are not missed.