Back in the old days, after rickets was considered a fashion accessory, but before language was reduced to the need to fit with a 140 character limit, pensions were considered “complicated” (I can feel the collective wave of shock emanating from you all as you read this).

With this in mind, the Government and HMRC decided to ride to the rescue of our poor little minds that couldn’t take in all the rules that applied, and introduced Pensions Simplification (oh, how I hear you all laugh). Arguably, this has now become even more complicated than the regime it replaced but that’s for another blog. What it did introduce, as a fundamental principle, was the notion of the Lifetime Allowance (LTA).

In simple terms, the LTA is the limit of pension money you’re allowed to accumulate during your lifetime that doesn’t incur additional tax charges. It started at £1.5M, rose to £1.8M, then dropped back to £1M and, as of 6^th April 2018, has risen to £1.03M and will increase in line with CPI going forward (until the Government changes its mind again).

All sounds relatively straightforward so far, doesn’t it? Well, let me add a fly to the proverbial ointment. It’s all simple as long as you know what constitutes pension money. And what HMRC consider to be pension money may not exactly align with the view of the general population.

So, let’s start with the easy bit. HMRC consider the money you have in your pension to be pension money. So, if you look online and your pension provider tells you that you have £536,624 in your personal pension, that is your first bit of pension money.

Make it through to retirement and stop work, the LTA calculations are relatively straightforward. Die before retirement and you (or more precisely, your beneficiaries) may have a problem.

If your employer runs a Group Life Assurance scheme (also known as Death In Service) that pays a lump sum on death (fixed amount or a multiple of salary), the value of the payment may count against the LTA.

It’s not unreasonable to say that someone who has accumulated a fund of £536,624 is probably on a pretty decent salary. Let’s say, for the sake of argument, that this person is on £120,000 a year and their employer offers a Group Life giving 5x salary of life cover.

On death whilst still an employee, the payout to this fictitious employee’s beneficiaries will be: –

• £536,234 (return of the pension fund)
• £600,000 (5 x £120,000 of Group Life Assurance benefit)

The total payout is, therefore, £1,136,234. The excess over the LTA is £1,136,234 less £1,030,000 i.e. £106,234. If the beneficiaries wanted to take this amount as a lump sum, they would have to pay HMRC £58,428.70. That is a tax rate of 55%.

Faced with the loss of a loved one, is this the kind of news a grieving family would really want to hear? Especially if there had been a way around it?

The above scenario assumes that the Group Life had been written under pension rules (known as a Registered scheme). This is the most common way of writing Group Life and is fine for the vast majority of employees. For those who may have LTA issues (now or conceivably in the future) Group Life can be written under what are known as Excepted arrangements, meaning they do not count towards the LTA (that is not to say they do not escape tax entirely, but the circumstances of any potential tax arising are significantly different and the actual tax rates significantly lower).

And, if you are a switched on employee who has already applied for, and been granted, protection against the LTA using any of the Fixed Protections that were available in 2012, 2014 and 2016 you need to be doubly careful on changing jobs.

If you join a new employer who puts you into their Registered Group Life scheme, HMRC will consider you as having had “relevant benefit accrual”. This means you immediately lose any protection you had against the LTA, must notify HMRC within 90 days or be subject to a £3,000 fine plus a daily fine of £60 per day after the 90 days are up until the time you actually notify HMRC. Don’t tell HMRC for a year after you should have (because you didn’t know you had to, but ignorance is no excuse under the law) and your fine is £25,630, never mind the additional tax your beneficiaries could face.

So, in short, you need to ask yourself a number of questions: –

• Would the combined value of my pension money and my Group Life benefit exceed the LTA?
• If yes, does my employer offer a choice between a Registered and an Excepted Group Life scheme?
• And if you are changing jobs, what is your new employer’s policy on Group Life scheme membership? Most employers will use immediate entry i.e. from day 1 of employment, meaning immediate “relevant benefit accrual” and loss of protection against a 55% tax rate

And all this because HM Government and HMRC decided to make pensions simpler!

For a plain English guide to the continuing vagaries of our pensions system and its interaction with tax, do not hesitate to call us on 0333 241 3350 or email info@richmondhousecs.co.uk

 

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. All statements concerning taxation are based on our understanding of the current law and HMRC practice, and proposed changes, as at the date of publication.