Reduction of pensions lifetime allowance
Published 9 December 2015
© Crown copyright 2015
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This publication is available at https://www.gov.uk/government/publications/reduction-of-pensions-lifetime-allowance/reduction-of-pensions-lifetime-allowance
Who is likely to be affected
Individuals whose total UK tax relieved pension savings are near to or more than £1 million.
Employers who contribute to registered pension schemes on behalf of their employees.
Scheme administrators of registered pension schemes and advisers with clients who have UK tax relieved pension savings.
General description of the measure
This measure will reduce the standard lifetime allowance from £1.25 million (from tax year 2014 to 2015) to £1 million from tax year 2016 to 2017 onwards and increase the standard lifetime allowance each year by the increase in the consumer prices index from tax year 2018 to 2019 onwards.
Policy objective
The measure supports the government’s objective of a system of pensions tax relief that is fair, affordable and sustainable.
Background to the measure
This measure was announced at March Budget 2015 and confirmed at Summer Budget 2015.
Detailed proposal
Operative date
The reduction in the standard lifetime allowance (LTA) will have effect for the tax year 2016 to 2017 onwards and the increase in line with the consumer prices index will have effect for the tax year 2018 to 2019 onwards.
Current law
The current pensions tax rules for registered pension schemes came into force on 6 April 2006 (A-day) and are set out in Part 4 of the Finance Act (FA) 2004. Although there are no limits to how much can be saved in registered pension schemes, there is an annual and lifetime limit on the total amount of tax relieved pension savings that an individual can have.
The LTA is the maximum amount of tax relieved pension saving that an individual can build up over their lifetime. The standard LTA is £1.25 million. Tax relief on any pension benefits taken over the LTA is recovered by the application of the LTA tax charge to the excess, which is charged at 25% if the excess is taken as a pension or 55% if it is taken as a lump sum (sections 214 to 226 of FA 2004).
The LTA also applies to any savings individuals have built up with UK tax relief where they are a relieved member of a relieved non-UK pension scheme (paragraphs 13 to 19 of Schedule 34 to FA 2004).
The maximum tax free lump sum that an individual can normally have is 25% of their pension rights subject to an overall maximum of 25% of the standard LTA (paragraphs 1 to 3A of Schedule 29 to FA 2004).
The LTA was previously reduced in FA 2011 and FA 2013. To protect individuals who thought they would be affected by the reductions, three transitional protection regimes were introduced, fixed protection 12 (‘FP12’ - Schedule 18 FA11), fixed protection 14 (‘FP14’ -Schedule 22 FA13) and individual protection 14 (‘IP14’ - Schedule 6 FA14).
Proposed revisions
Legislation will be introduced in Finance Bill 2016 to reduce the standard lifetime allowance to £1 million for tax years 2016 to 2017 onwards and increase it in line with the increase in the consumer prices index for the tax year 2018 to 2019 onwards.
The increase will be based on the increase in the consumer prices index in the year to the previous September and where this is not a multiple of £100, it will be rounded up to the next £100.
Legislation will also introduce two further transitional protection regimes, ‘fixed protection 2016 (FP16)’ and ‘individual protection 2016 (IP16)’ for individuals with UK tax relieved pension rights of more than £1 million or who think they may have rights in excess of £1 million by the time they take their pension benefits.
FP16 and IP16 will work in a similar way to the two previous transitional protection regimes, FP14 and IP14. Individuals have to obtain a reference number from HM Revenue and Customs (HMRC) if they want to rely on FP16 or IP16, before they take their benefits. Individuals with FP16 will have a personal lifetime allowance equal to the greater of £1.25 million and the standard lifetime allowance. Individuals with IP16 will have a protected LTA of the value of their pension savings on 5 April 2016 subject to an overall limit of £1.25 million.
The conditions for maintaining FP16 include that:
- individuals in defined contribution pension schemes must ensure that no further pension contributions are received by the scheme on or after 6 April 2016
- individuals in a defined benefits scheme must not accrue further benefits above a ’relevant percentage’ after 5 April 2016. The relevant percentage for defined benefit savings will normally be either the annual rate specified in scheme rules as of 9 December 2015 for the revaluation of accrued rights, or CPI (if no rate is specified), although certain statutory increases will be excluded from the test
Individuals with IP16 will be able to carry on actively saving in a registered pension scheme, should they so wish, but would be subject to the LTA charge on any excess savings over their personal LTA when they take their benefits.
Relieved members of relieved non-UK pension schemes will also be able to apply for FP16 subject to their not having a pension input amount of greater than nil in the non-UK pension scheme in any tax year from 2016 to 2017.
An amendment will be made to ensure that, where an individual dies before 6 April 2016, but a relevant lump sum death benefit is paid on or after 6 April 2016, the relevant lump sum death benefit will be tested against the standard lifetime allowance at the time of the individual’s death.
Individuals will be able to apply for both FP16 and IP16. Where an individual holds FP16 and IP16, FP16 will take precedence, but should this be lost the individual will revert to IP16.
Changes are also being made to FA 2004 to ensure that individuals who have primary or enhanced protection, with no lump sum protection, receive the pension commencement lump sum intended by the legislation.
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 |
|---|---|---|---|---|
| +60 | +300 | +420 | +550 | +590 |
These figures are set out in Table 2.1 of March Budget 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside March Budget 2015.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
The reduction in the lifetime allowance could lead to an increase in the tax paid by those affected. Some reduction of pension contributions is expected in response to the measure.
Impact on individuals, households and families
The reduction in the lifetime allowance affects those who could have pension wealth between the new and the old lifetime allowances when they retire. Around 55,000 individuals are expected to have pension assets that are worth between £1 million and £1.25 million in 2016 to 2017.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
HMRC’s data does not allow identification of groups sharing protected characteristics within the affected population. The change will have a greater effect on those later in life and closer to retirement than those in other age groups. No other impacts are anticipated in respect of groups sharing other protected characteristics.
Impact on business including civil society organisations
There will be some additional burdens for pension schemes and employers to provide information and guidance to individuals, and to update their systems to reflect the reduced lifetime allowance.
Anticipated one-off burdens include: salary and pension adjustments, legal and consultation advice, providing valuations of pension savings, and training and familiarisation.
Anticipated ongoing burden increases arise from the need for pension schemes to send individuals their contribution values dealing with lifetime allowance charges.
In total, HMRC anticipates one-off costs across employers and pension schemes of £46.6 million, and additional burdens of £0.2 million per annum.
Estimates of compliance costs are shown in the table below:
| Estimated one-off impact on administrative burden (£m) | |
|---|---|
| One-off impact | (£m) |
| Costs | 46.6 |
| Savings | - |
| Estimated ongoing impact on administrative burden (£m) | |
|---|---|
| Ongoing average annual impact | (£m) |
| Costs | 0.2 |
| Savings | - |
| Net impact on annual administrative burden | +0.2 |
Small and micro business assessment: the impact on small and micro business has been considered. The measure restricts the amount of UK tax relief available to individuals on their pension savings. The original policy was subject to a formal consultation in 2010 and was widely discussed with business, individuals and experts throughout the development process. The implementation of this further change, particularly around any tools, guidance or help that can be offered, will also be discussed over the next twelve months with interested parties. It would not be appropriate for the policy to apply differently according to the size of the firm within which the affected workers operate.
Operational impact (£m) (HMRC or other)
There will be additional costs for HMRC to administer and monitor the new protection regimes and deal with enquiries from customers. These are estimated to be £2.4 million for IT changes and £500,000 for staff resources over a five year period.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups. HMRC will also monitor behavioural responses to the restriction of pensions tax relief.
Further advice
If you have any questions about this change, please contact Samantha Skill on Telephone: 03000 564149 or email: pensions.policy@hmrc.gsi.gov.uk