Ever since the introduction of the Lifetime Allowance (LTA) in April 2006 as a Treasury tool for raising more revenue from owners of high value pension schemes, successive Chancellors of the Exchequer have tinkered with the threshold beyond which a LTA tax charge applies. David Marsh, the Pensions Secretary of the Forces Pension Society, looks at the latest legislation, due to be implemented on 6th April 2016, and what individuals can do to protect themselves from an unwelcome tax charge on some, or all, of their pension value…
In his Budget Speech in March this year, reiterated again in his emergency Budget Speech later in July following the Conservative party’s general election victory, George Osborne, the Chancellor of the Exchequer, made clear his intention to reduce the threshold at which pension values would incur a LTA tax charge, from £1.25m to £1m from 6th April 2016.
The LTA threshold, when first introduced in April 2006, was set at £1.5m. This threshold progressively increased to £1.8m until 6th April 2012, when it was reduced back down to £1.5m. On 6th April 2014 it was reduced again from £1.5m to £1.25m and in April next year the threshold drops to its lowest ever level of £1m. Progressively therefore, what was initially billed as a tax on the very well off, initially catching members of the Armed Forces holding the ranks of very senior Major Generals, Rear Admirals and Air Vice Marshals and above is becoming increasingly more insidious and creeping downwards, embracing Brigadiers, Commodores and Air Commodores, and as at 6th April next year, senior Colonels, Royal Navy Captains and RAF Group Captains.
This group will find their pension values starting to exceed this new threshold, and thereby incurring a LTA tax charge – as may others who expect to add significantly to their pensions once they have left the Armed Forces.
The Chancellor has started fishing with ever smaller mesh in his nets to ensure that his catch increases and there are strong rumours (as yet unconfirmed) that the mesh will get smaller still catching those even further down the rank structure. This method of fishing has been called by some “a tax on promotion”, for although it won’t make you worse off if you are promoted, it will certainly increase your long term liabilities and may make you ponder your priorities. So it is very much one to watch.
But if you find yourself in this position (or expect to find yourself in this position in the future) there is something you can do to protect yourselves from this form of bottom trawling. There are two options open (although both are not available to all) – one of which is the more obviously sensible to most, and another that is a little more drastic. They are:
a. Fixed Protection
This allows every individual to “fix” their LTA threshold at £1.25m, regardless of how much the value of their pension is on 6th April 2016. However, this form of protection is like a puffer fish – it comes with a couple of nasty stings that can make your eyes water:
i. If you take Fixed Protection you are not permitted to accrue any further pension in any pension scheme from 6th April 2016 onwards (with the exception of the State Pension, which is not included in LTA tax calculations). This will not be too much of an issue whilst remaining in the Armed Forces, since you merely have to let Veterans UK in Glasgow know of your protection and request you are removed from any future accrual of the Armed Forces Pension Scheme from 6th April 2016. However, once outside in Civvy Street you may unknowingly find your new employer has enrolled you automatically into another pension scheme in accordance with new pension laws, and whilst you have the opportunity to opt out of these schemes, if you do not realise you have been enrolled, or do not act to remove yourself because you do not understand the implications, you could find yourself in conflict with the Treasury and risk losing your Fixed Protection – and earning a £300 fine to boot for not informing HMRC that you have breached the terms and conditions under which Fixed Protection was granted to you.
ii. If you take Fixed Protection whilst serving and leave the Armed Forces Pension scheme from 6th April 2016, on that same date you will lose your pension scheme’s Death in Service cover and Ill Health pension award cover (you will still be eligible for potential awards from the Armed Forces Compensation Scheme and Early Departure Payment schemes since they are not dependent on you being a member of an Armed Forces Pension Scheme). For a Lieutenant Colonel this would mean throwing away £300,000 of life cover that is costing you nothing, and a Sergeant would be ditching around £140,000 of free life cover.
If you intend to take out Fixed Protection you must apply before 6th April 2016, although at the time of writing this article the application form was not available on the HMRC website.
b. Individual Protection
Individual Protection is available only to those who have a pension value of £1m or more on 6th April 2016; if your pension value is less than £1m on 6th April 2016 you cannot take out this form of protection; even if you expect that at a later date your pension value will exceed the £1m threshold. The primary differences between Individual Protection and Fixed Protection are:
i. You can only protect the value of your pension as at 6th April 2016, and it has to be a figure of at least £1m on that date.
ii. You cannot protect any greater value than £1.25m on 6th April 2016, the current LTA threshold figure, even if your pension is worth more than that.
iii. You are allowed to continue accruing pension in any pension scheme after taking out Individual Protection, albeit in the knowledge that every £1 of additional value will incur a LTA tax charge.
iv. You retain your Death in Service cover and Ill Health cover.
v. You cannot apply for Individual Protection until after 5th April 2016 – HMRC quite rightly will not issue Individual Protection Certificates based on a forecast; only on a known entitlement. The application forms for Individual Protection are also not yet available on the HMRC website at the time of writing this article.
What of the future?
The Chancellor has promised that the LTA threshold will increase by the CPI rate of inflation from 6th April 2018 onwards.
However, spies have also reported the Chancellor’s trawler men experimenting with an even smaller mesh – specialised ‘drag’ nets designed to catch only fish that feed in the waters of defined benefits pension schemes such as all public sector pension schemes. These nets are not going to reduce the size of the LTA threshold, but could increase the multiplication factor used to determine a defined pension scheme’s annual pension value.
Currently the calculation used to determine such a pension’s value is to multiply the annual pension award by 20 and add any automatic lump sum, but it seems these new nets will multiply the annual pension award by 29 and add any automatic lump sum. If the Chancellor deploys these nets he will begin to catch Lieutenant Colonels with more than 27 years’ service. In other words, any fish with a pension value girth exceeding £31,250 will be ‘dragged’ into paying a LTA tax charge.
The big question is, will he do it or not? Bigger nets carry bigger risks (like catching submarines). So there is a political calculation to be made – is the benefit worth the risk of potential further damage to the confidence of those in the public sector?
If you have questions about your Armed Forces Pension and you are a member of the Forces Pension Society, you can call the Society’s dedicated help line on 020 7735 0110 or find answers on its web site. If you are not yet a member, the cost is modest and benefits (in addition to the best available expert advice) include discounts on a range of useful products and services and the assurance that a dedicated organisation, independent of the Government, is there to help you get the most from your Armed Forces pension.
For more information, go towww.ForcesPensionSociety.org