Pension Lifetime Allowance 2012 Explained
The Treasury confirmed new legislation with effect from 2012 for changes to Pension Lifetime Allowances, the maximum value of pension funds that you take in your lifetime.
The Lifetime Allowance April 2012 – reduced to £1.5m from £1.8m
This is a calculation done when you take pension benefits e.g. retire and buy an annuity, release a tax free lump sum or take pension drawdown.
Example: Mr Smith in planning to retire in this next 2 yrs. He has:
Retiring before April 2012 - Lifetime Allowance Calculation (assuming no further growth)
Retiring after April 2012 - Lifetime Allowance Calculation (assuming no further growth)
Pension Contributions After Age 75
Pension contributions after age 75 will not receive tax relief and will be a test against the Lifetime Allowance at age 75 regardless of whether pension benefits have been crystallised at that point.
Mr Smith should retire before 2012.
On 6 April 2012 the lifetime allowance (the maximum you can accrue in total in your pension funds) throughout your lifetime will be reduced from £1.8m to £1.5m.
Pension Fund Already Exceeds Lifetime Allowance - If you have a pension fund larger than £1.5m you may face a tax charge on the day you retire on or after 6 April 2012.
Transition Enhannced and Primary Protection (2006) - Some people may have already protected their large pension fund benefits before 2006 by using Enhanced or Primary Protection. If this is the case, you are unaffected
Fixed Protection from 2012 - If your pension fund is already over £1.5m ... do you qualify for fixed protection.
Who qualifies for protection?
How do I apply for fixed protection?
Latest date for application for fixed protection
Can I still make pension contributions if I have registered for fixed protection?
Can I transfer pensions and keep fixed protection?
Transferring pensions and losing fixed protection
2. The End of Contracting Out in 2012 - The end of protected rights.
It is not common knowledge that we have a second state pension on top of our basic state pension in the UK.
This is paid for from national insurance contributions (NIC). Many years ago it was called the Graduated Scheme, then it changed to SERPS in the late 1970’s and now it is the State Second Pension (S2P).
Many people ‘contracted out’ to have their national insurance payments paid into their own pension.
On 6th April, contracting out ends for personal pensions but not for ‘final salary’ pension schemes.
Your ‘protected rights’ funds will automatically be converted to ‘ordinary’ pension rights, just like premiums you have paid in. It will still be possible for final salary pension schemes to be contracted out, thus using your national insurance to subsidise the company pension.
Some may be better served cancelling their contracting out before 6th April, so that this year’s NIC rebate will go back into the state second pension.
Others may prefer that this year’s national insurance ‘rebate’ should still go into their own private pots, given the huge changes coming for state pension ages.
Speak to a professional today and see if your funds are protected.