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Reduction in Lifetime Allowance

The Lifetime Allowance (LTA) is the total pension savings you can have without paying an extra tax charge.

The LTA will reduce from April 2016 to £1 million and then increase by inflation each year. This means that you will pay an extra tax charge if the value of your pension savings in all the pension schemes of which you have been a member add up to over £1 million when you come to take them.

If your savings are either over £1 million now or will be by the time you retire, you can avoid the tax charge by applying for ‘protection’ from HMRC. Even if you apply for protection, the value of your pension savings at retirement must be less than £1.25 million, which is the current LTA, or the LTA in force at that time if it’s higher.

HMRC Protection

HMRC is unable to process applications for Fixed Protection 2016 before 6th April 2016. Applications for Fixed Protection 2016 and Individual Protection 2016 will be made online using a new HMRC self-service tool, which is expected to be available to you or your independent financial adviser from July 2016.

There are two types of protection available from HMRC:

  1. Fixed Protection 2016:
    Even if the value of your total pension savings is less than £1 million now but, with investment returns and inflation increases (if you have a defined benefit pension in a previous scheme), it could increase to more than £1 million by the time you take your pension, you can opt out of pension saving now and apply for Fixed Protection. By applying for Fixed Protection now, your pension savings can increase to a maximum of £1.25 million by retirement (or the LTA in force at that time if it is higher) and you won’t have to pay an extra tax charge. You would not be able to make any further pension savings after 5th April 2016, which means you need to tell the Pensions Department by 8th April 2016 that you wish to stop pension saving.
  2. Individual Protection 2016:
    If the value of your total pension savings is over £1 million now, you can apply for Individual Protection. You’ll then have your own individually protected LTA which would be the value of your pension on 6th April 2016 up to a maximum of £1.25 million. If the value of your pensions when you take them is over £1 million but less than your own individually protected LTA, you won’t have to pay an extra tax charge. This might be useful if you intend to take a defined benefit pension which will be reduced for early payment, so there may be a bit of scope to build up some more pension.HMRC are unable to process applications for Fixed Protection 2016 before 6th April 2016. Applications for Fixed Protection 2016 and Individual Protection 2016 will made online using a new HMRC self-service tool, which is expected to be available to you or your independent financial adviser from July 2016.

To work out whether you may need protection you can use our guide to calculating the value of your SIPP by clicking on the link below.

Guide to valuing your SIPP

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If you also have pension in the Sainsbury’s Pension Scheme, you can use our guide to calculating the value of your pension by clicking on the link below:

Guide to valuing your SPS pension

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