lifetime
allowance and protections (51)
life assurance and automatic enrolment
might be bad for you
by
Roderick Ramage, solicitor, www.law-office.co.uk
first
posted on this site on 1 January 2017
DISCLAIMER
This article is not advice to any
person and may not be taken as a definitive statement of the law in general or
in any particular case. The author does not accept any responsibility for
anything that any person does or does not do as a result of reading it.
wealth warnings
A simple illustration of the most obvious
risk is a well paid employee with a good pension scheme who dies before
retirement. The value of his (or her, but I keep to “he” etc for short) pension
fund is exactly £1m, which, since 6 April 2016, has been the amount of a
member’s lifetime allowance (LTA).
Assume for simplicity that none of his pension fund had
previously been crystallised and that the whole of it is crystallised by
purchasing an annuity for a dependant (event 5D in the table in FA 2004
s216(1). If there is no other pension
benefit, there will be no tax consequences.
But, if the employer is a member of the employer’s registered death in
service scheme, which pays a lump sum of 4 x the member’s salary and his annual
salary was £100k, the lump sum of £400k will be another benefit crystallisation
event (event 7 in the same table), bringing the total to £1.4m The excess of the over the LTA is taxable
under the FA 2004 s214 at, under s215, 55% if it is taken as a lump sum or 25%
if taken as pension. If there are
different beneficiaries of these benefits, the liability for the LTA charge is
to be apportioned equitably: FA 2004 s217(4).
Less obvious but potentially more serious tax
consequences can affect taxpayers who have but lose protection against the
LTA charge (see below). A taxpayer
with enhanced or one of the fixed protections, who, as a condition for
protection, must not accrue further benefits, will lose it if he joins a new
arrangement, with the result that, on any future benefit crystallisation event,
the then current and not the protected LTA will apply. Two areas of risk are as follows.
Automatic enrolment under the Pensions Act
2008. If the taxpayer is enrolled or re-enrolled
automatically, protection will not be lost if he opts out in the statutory
opt-out period. From 1 April 2015,
employers are not obliged to enrol or re-enrol an employee if they have
reasonable grounds to believe that he has enhanced or one for the fixed
protections.
Automatic enrolment into some other pension
scheme,
typically a death in service scheme.
Protection will be lost unless either the scheme has a rule that treats
a member who opts out as never having been a member or the employee cancels the
pension arrangement under the FCA cancellation rules.
alternatives for
highly paid employees
The above notes and the tables on the next page apply
only to schemes registered with HMRC under the FA 2004. Unregistered arrangements might be preferred
by employees for whom the allowances affecting registered schemes are too low.
employer-financed retirement benefits schemes These are the modern equivalents of FURBS and
UURBS. There is no restriction on the
amount of the member’s benefits. No
income tax or NICs are incurred by the employee in respect of the employer’s
contributions. The employer receives no
corporation tax relief until benefits are paid to the employee. See Income Tax (Earnings and Pensions) Act
2003 (ITEPA 2003) Part 7A.
life assurance Employers may provide relevant and excepted
life assurance policies under, respectively, ITEPA 2003 s393B(4)(b) and Income
Tax (Trading and Other Income) Act 2005 s480(3). The former are individual and the latter
group policies. Neither of these affect
the employee’s AA or LTA. Employers
normally enjoy corporation tax relief on contributions. One can ask now why employers establish
registered schemes for death in service insurance for any employees.
the allowances
Under the taxing reforms introduced by the Finance Act
2004 from 6 April 2006, a taxpayer has two pension allowances. The first is the annual allowance (AA), which
is the maximum amount that may be paid in any year and on which tax relief is
granted. An individual’s AA is the
greater of £3,600 and 100% of his UK taxable earnings up to the amounts in the
following table. The second is the
lifetime allowance (LTA), which is the value of the member’s pension fund at
any benefit crystallisation event (BCE), taking account of any prior
crystallisations.
|
tax year |
annual |
lifetime |
|
tax year |
annual |
Lifetime |
|
2006/07 |
£215,000 |
£1,500,000 |
|
2009/10 |
£245,000 |
£1,750,000 |
|
2007/08 |
£225,000 |
£1,600,000 |
|
2010/11 |
£255,000 |
£1,800,000 |
|
2008/09 |
£235,000 |
£1,650,000 |
|
2011/12 |
£50,000 |
£1,800,000 |
|
2012/13 |
£50,000 |
£1,500,000 |
|
2013/14 |
£50,000 |
£1,500,000 |
|
2014/15 |
£40,000 |
£1,250,000 |
|
2015/16 |
£40,000 |
£1,250,000 |
|
2016/17 |
* £40,000 |
£1,000,000 |
|
2017/18 |
|
|
* This is reduced in some circumstances. Broadly speaking: “tapered” relief reduces
the annual allowance to £10,000 for taxpayers’ whose income is £210,000 and
over; and, where the taxpayer has started flex-drawdown, it has been reduced to
£10,000 and, if the 2016 Autumn budget statement is implemented, will be
further reduced to £4,000 from 6 April 2017.
protection against
LTA charge
Taxpayers’ existing rights on the introduction and each
change of the LTA can be protected to some extent against tax charges. The following table, prepared by Ian
Greenstreet of Nabarro and copied with permission) summarises the protections
that have been made available.
|
Protection |
What is
covered |
Formalities
|
Future
accrual |
|
Primary |
Savings
>£1.8m at 5 April 2006 |
Notify
HMRC by 5 April 2009 |
Yes |
|
Enhanced |
Fully
protects rights accrued as at 5 April 2006 |
Notify
HMRC by 5 April 2009 and no accrual from 6 April 2009 |
No |
|
Fixed |
Fixes LA
at £1.8m (or SLA if higher) |
Apply to
HMRC by 5 April 2012. Not needed for
those with primary or enhanced protection |
No |
|
Fixed
2014 |
Fixes LA
at £1.5m (or SLA if higher) |
Apply to
HMRC by 5 April 2014. Not needed for
those with primary, enhanced or fixed protection |
No |
|
Individual
2014 |
Savings
>£1.25m at 5 April 2014. Fixes LA
as value of pension rights at 5 April 2014 (max £1.5m or SLA if higher. |
Apply to
HMRC by 5 April 2017. Not available to
those with primary protection. |
Yes |
|
Fixed
2016 |
Fixes LA
at £1.25m (or SLA if higher) |
Apply
online to HMRC from July 2016. Not
available to those with primary, enhanced or fixed protection or FP14 |
No |
|
Individual
2016 |
Savings
>£1m at 5 April 2016. Fixes LA as
value of pension rights at 5 April 2016 (max £1.25m or SLA if higher. |
Apply to
HMRC from July 2016. Not available to
those with primary protection or IP14. |
Yes |
END
copyright Roderick Ramage
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