Changes to the Lifetime Allowance, Annual Allowance and Capped Drawdown rates

Update on the Chancellors Autumn Statement announcements

Lifetime Allowance

The Lifetime Allowance is the maximum amount of pension savings, that an individual can accumulate free of tax, across all pension funds. The Lifetime Allowance is currently £1.5 million. However, this will be reduced to £1.25 million from the 6th April 2014.
Members with enhanced, primary or fixed protection will not be affected by the reduction in the lifetime allowance. A member will lose fixed protection or enhanced protection if further contributions are paid by or on their behalf.
The Chancellor announced a new “Fixed Protection 2014” will be available for those who may be affected by this cut. The forms are expected to be ready by the summer of this year, with a deadline for submitting them to HMRC of 5th April 2014.
The Chancellor also announced that they are considering a new “personalised protection” in addition to Fixed Protection. This would allow members whose pension savings are over £1.25 million on 5th April 2014 to continue to make pension contributions with an individual lifetime allowance of the greater of the value of their pension rights on that date and the new lifetime allowance. The Government will discuss this possibility with interested parties.

Annual Allowance

The Annual Allowance is the total amount that can be contributed to pension schemes for an individual each year that will qualify for tax relief. It is currently £50,000 per annum. However, this will be reduced from £50,000 to £40,000 from the 6th April 2014.
For people who do not use all of their annual allowance in a particular year, they can carry forward any unused relief for up to three years, provided they were a member of a registered pension scheme during the period.
The Government has confirmed that the amount that will be available to be carried forward will be based on the annual allowance that was applicable in the year that the member is carrying forward from.
Please note that other thresholds also apply to contributions. Individuals will only receive tax relief on personal contributions up to 100% of relevant UK earnings. Employers will only receive tax relief on company contributions where the contribution is ‘wholly and exclusively for the purposes of the business’.

Capped Drawdown

In 2011, the Government reduced the rate that we use to calculate the maximum pension that a member can draw from their pension each year under capped drawdown. We were required to use 100% of the Government Actuary Department (GAD) Rate, rather than the 120% that we could use previously.
The Government has now announced that the rate will be brought back up to 120% of GAD. Legislation is needed to affect this change, but the draft legislation has been released for consultation.
The change will take effect from the 26th March 2013. This means that members can take advantage of this new rate at their next pension review after this date. Members can also request an interim review at any pension year end falling after the date.
However, please note that since the primary legislation will not be enacted until the summer of 2013, we cannot allow members to draw their full entitlement until that time in case the rules are amended before they become law.