How to avoid a tax charge after April's Pension Lifetime Allowance cut

The Government has published draft details of the protection regime that will apply after the lifetime allowance (LTA) is cut in April. Chancellor George Osborne announced the cut, which will see the LTA reduce from £1.25 to £1m, in the 2015 Budget. 

The Government's draft finance bill, published in December, provides information on how savers who have already built up pensions worth more than £1m can avoid a tax charge. 
Under the fixed protection (FP16) proposals most people will be able to protect an amount of £1.25m, as long as they cease contributions before 6 April 2016. Similar rules apply under the individual protection (IP16) proposals. 

The draft bill also stipulates that those who had built up an entitlement to a cash lump sum of less than £375,000 before 6 April 2006 (A-Day) will be able to preserve that rather than being restricted to the 25% taxation of the current or reduced LTA. 

If a person dies before 6 April 2016, but a benefit is not paid out until after that date, the previous LTA of £1.25m will apply. 

There are also changes to the way the protections can be applied for. This time round, there are no certificates issued, as there were in previous years. 

However, individuals who are retiring before July 2016 and need to apply for an FP16 or IP16 should write to HM Revenue and Customs (HMRC) for a temporary reference number. The details are set out in HMRC's newsletter 74. 

If you would like to discuss the impact of the draft legislation on your pension, and in particular if you should cease contributions before 6 April 2016, please contact our Chartered Financial Planning team.