Dennis was one of the clients on the schedule and it appeared from his file that he had received little contact since 2006.
On his file was a note saying no real contact needed as the client would get in touch when he wanted something.
Dennis was a solicitor and had crystallised £900,000 of his £1.1million pension in late 2006 when he was 60. He had not applied for any form of protection (primary, enhanced or fixed protection 2012) previously and the lack of pension being drawn meant his original drawdown fund of £675,000 had grown to around £850,000. The uncrystallised pot was now worth around £250,000.
The £900,000 crystallisation figure meant 60% of the standard lifetime allowance had been used up in 2006 (£900,000/£1,500,000).
This left 40% of the LTA for the later crystallisation and when Dennis reached 75 and any growth in crystallised benefits was tested again.
Alex knew how the LTA had changed over the years. It was introduced in 2006 as part of the pensions simplification regime, starting at £1.5 million and increasing as prescribed to £1.8 million in 2010/2011. In 2012 it had been reduced from £1.8 million to £1.5 million and remained at this figure until the proposed change to £1.25 million in 2014.
At the point of reduction from £1.8 million it had been possible to protect an LTA of £1.8 million and now with the second reduction to £1.25 million it would be possible to protect up to the current LTA, namely £1.5 million.
When individuals take benefits from registered pension schemes (crystallise benefits), they use up a percentage of their LTA. If they take more benefits later, the additional benefits are tested against the remaining percentage of the member's LTA.
In Alex’s mind he had already worked out that Dennis really had to do something.
With an LTA of £1.5 million Dennis’s unused 40% of the standard LTA was worth £600,000 however with an LTA of £1.25 million the unused 40% of the reduced LTA would now be worth £500,000. Anything in excess of this would be subject to a lifetime allowance charge. If the growth in both uncrystallised and crystallised benefits continued, this was likely to be a real issue.
The new protection regime for 2014 offered two options. Fixed protection 2014 which would allow protection of £1.5 million but by applying Dennis would not be able to pay any further pension contributions or accrue any defined pension benefit. Alternatively individual protection (subject to consultation) would appear to allow the opportunity of securing an LTA of up to £1.5 million but with the option of making up any shortfall if the valuation is less than £1.5 million.
The problem with individual protection was that, to apply, Dennis’s fund would have to be valued at between £1.25 million and £1.5 million at 5 April 2014 and HMRC’s proposed method for valuing crystallised benefits (based around the historic amount crystallised rather than current fund value) meant the benefits only had a current value of £1,150,000 – the original £900,000 crystallised in 2006 and the current uncrystallised value of £250,000.
At the back of his mind Alex was wondering how much extra contribution Dennis could put in and if somehow he could get above the magic £1.25 million. His quick mental calculation suggested that he could use the £50,000 annual allowance for the current tax year (before the reduction to £40,000 in 2014) and, as it did not seem that Dennis had paid anything for the last three years, a considerable amount to carry forward.
He also wondered whether it might be possible to squeeze an extra contribution in for next year depending on pension input periods. It is the tax year in which a pension input period ends that the Annual Allowance is tested against. So closing your current input period now, and opening another one immediately, enables you to invest next year’s allowance in the current tax year.
Alex knew there were restrictions regarding the flexibility of shortening pension input periods and that you could only have one input period ending per tax year but wondered if he could pay a large enough contribution to go past the £1.25 million needed to apply for individual protection. He felt a meeting needed to be arranged – there was some real value to be added here.
Mike Morrison
Head of Platform Marketing
AJ Bell