Budget 2015 Lifetime Allowance

Budget 2015 Lifetime Allowance.

The maximum that you can accrue in a pension scheme throughout your lifetime is currently £1.25 million.  This will remain in place for the tax year 2015/16.

In the budget, Chancellor George Osborne confirmed that the lifetime allowance will reduce for tax years 2016/17 to 2017/2018 to £1 million.  From the tax year 2018/19 the lifetime allowance will then increase in line with CPI (consumer prices index).

This is a new major tax blow not just to higher earners with larger pension funds but is now starting to impact on many other workers who have saved in pension funds for many years.  To put this in perspective, if you have accrued a salary related pension scheme of the equivalent of £50,000 per annum, you are already at the £1 million ceiling given that the multiple for a defined benefit pension used by HMRC is 20 times.

If you exceed the £1 million lifetime allowance you will face a tax charge unless you register for protection.  This means that you must apply to HMRC for Individual Protection 2014 by 5 April 2017.

This, in our opinion, is a stealth tax that will apply to more and more people over the years given that the lifetime allowance will only increase in line with inflation starting in three years’ time yet our pension rights usually accrue in line with our earnings.  Earnings inflation is usually higher than consumer prices inflation.

• Is this a disincentive to maximise our pensions?
• Will this encourage all indeed force highflyers to resign their positions as they will face additional tax if they remain in employment and accrue further pension rights?
• Is this a cynical move by the government to encourage people to leave employment which, indirectly creates new employment?
• Alternatively, will this move encourage highflyers to leave employment and establish their own small business enterprises thus creating employment and indeed when they come to sell their new start-up business possibly making use of 10% entrepreneurs relief?

We have dealt with many clients over the last few years that are caught by the ever reducing lifetime allowance for pensions and indeed many of them have been forced to leave their roles in view of the increased taxation position.

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