Introduction Background
29.Individuals can save as much as they like in a registered pension scheme subject to overall limits on the amount of tax relief their pension savings can benefit from. These limits are the lifetime and annual allowances. The Government announced on 5 December 2012 that tax relief for pension savings was to be restricted through a reduction in the lifetime and annual allowances.
30.The lifetime allowance is the maximum amount of pension and/or lump sum that an individual can take from their pension schemes that benefit from UK tax relief.
31.When an individual becomes entitled to their pension benefits, these benefits are tested to see if they exceed the individual’s lifetime allowance. If they do exceed this, then there is a tax charge on the amount over their lifetime allowance. This tax charge is called the lifetime allowance charge. The rate of the lifetime allowance charge will depend on how the individual takes their benefits. Any amount over the lifetime allowance taken as a lump sum is taxable at 55 per cent whilst any amount used to provide a pension is taxable at 25 per cent.
32.Section 47 and Schedule 21 restrict tax relief for pension savings by reducing the level of the lifetime allowance provided for in section 218 of FA 2004.
33.The level of the standard lifetime allowance is reduced to £1,250,000 with effect from 6 April 2014. A new transitional protection (‘fixed protection 2014’) comes into force on the same date. Individuals with fixed protection 2014 have a lifetime allowance of the greater of £1,500,000 and the standard lifetime allowance.
34.Schedule 21 also makes a number of consequential changes to the existing pensions tax legislation in FA 2004.