In principle all the existing eight tax regimes for pensions come into the new regime on A-day. But if an individual's pension fund is currently near to or already above the lifetime allowance, it will be possible to have some or complete protection from the lifetime allowance charge.
Two types of protection will be available.
Protection will be given to the value of pre A-day pension rights and benefits in excess of £1.5 million. The pre A-day value will be indexed in line with the indexation of the statutory lifetime allowance up to the date that benefits are taken.
This is available whatever the value of the fund so long as active membership of approved pension schemes ceases before A-day ie contributions are not made to any pension scheme after A-day. All benefits coming into payment after A-day will then normally be exempt from the lifetime allowance charge.
Enhanced protection is likely to be beneficial for those with funds in excess of £1.5 million by April 2006 and for those with funds below that level but who expect investment growth well above inflation.
Example |
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| Primary protection | Enhanced protection | |
| Fund at A-day | £2,000,000 | £2,000,000 |
| Fund at retirement | £3,000,000 | £3,000,000 |
| Revalued A-day fund after increase in line with lifetime allowance - say | £2,600,000 | N/A |
| Excess subject to lifetime allowance tax charge at 25%/55% | £400,000 | Nil |