Members will be aware that Lifetime Allowance (LTA) is to be reduced from the current threshold of £1.25m to £1.0m with effect from 6th April 2016. LTA is the maximum amount that can be accrued in a pension pot before taxation is applied to any excess over that figure. As police officers are part of a final salary (or Defined Benefit) pension scheme we have a ‘notional’ pension pot rather than an actual one. The value of our notional pension pot is calculated by multiplying annual pension by a factor of 20.
LTA has not previously been an issue for members of this Association, however, the reduction in the threshold to £1.0m will mean that all Chief Superintendents in the 1987 PPS will, as the approach 30 years of service, exceed the LTA; as will Superintendents on pay point 4 of the new pay scale at the point at which they reach 30 years of service.
It is worth noting that Superintendents who exceed the LTA in the circumstances described above will do so only by a marginal amount. In the fullness of time, Superintendents may well revert to being below the LTA as the Chancellor has undertaken to introduce an updating mechanism for LTA in line with CPI. If CPI exceeds wage inflation, which would seem likely in view of the Chief Secretary to the Treasury’s recent letter to Chairs of the various pay review bodies relating to continuing pay restraint, the value of a Superintendent’s pension pot may come under the LTA threshold in future years.
It should also be noted that where members have pension provision in addition to their police pension, this will also count towards LTA. State pension, however, does not need to be included in this figure.
When he announced that LTA would be reduced with effect from 6th April 2016, the Chancellor gave a commitment that protection arrangements would be made available to prevent the change having a retrospective impact. Most commentators have assumed that the protection arrangements that were made available when LTA was reduced from £1.5m to £1.25 in 2014 would be replicated.
Together with colleagues from ASPS, SANI and CPOSA we did make a submission to HMRC that our members should be afforded bespoke protection arrangements to reflect the specific provisions of the police pension scheme, notably the detrimental impact upon our pension accrual resulting from a non-uniform rate of accrual and incremental progression rather than ‘spot’ salaries. Unfortunately, our request has not been acted upon.
Details of the protection arrangements that will be made available by HMRC are now emerging and were published recently in HMRC’s newsletter. A link to the newsletter can be found here. An extract of the newsletter is shown below:
“From April 2016 there will be two protection regimes available, Individual Protection 2016 (IP2016) and Fixed Protection 2016 (FP2016). There will be no application deadline for these protections.
However individuals will need to apply for protection before they take their benefits as they will need the HMRC reference number if they want to rely on the protection.
This means that those wanting to rely on IP2016 or FP2016 should apply before they take any benefits on or after 6 April 2016. This is so that those benefits can be tested against the higher Lifetime Allowance (LTA) provided by these protections rather than the £1 million standard LTA. This applies even when the benefits being taken are worth less than £1 million.
We are introducing a new online self-service for pension scheme members to apply for protection and this service will be available for members to use from July 2016.
Members will no longer receive a lifetime allowance protection certificate, instead once they have successfully applied for protection the online service will provide them with a reference number which they will need to keep.
We are also introducing an online service for scheme administrators to check the protection status of their scheme members. We are exploring options for what this will look like and will provide more information on this in due course. We will continue to work with scheme administrators to ensure information about lifetime allowance protections reaches your members.
Interim process. There will be a period between the new protection regimes becoming available in April 2016 and the introduction of the new online self-service in July 2016. For this period we will introduce an interim process for pension scheme members who want to take benefits before the introduction of the new online service.
Scheme members will be able to write to HMRC between April 2016 and July 2016 and we will check the details of their protection and respond to the member in writing. This can then be presented to the scheme administrator in advance of the full application being made after July 2016.”
Further information will be provided as HMRC’s rules develop more fully. Whilst it cannot be assumed at this stage that the 2014 process will be wholly replicated, in the event that they are, Fixed Protection (FP) will allow you to claim the LTA of £1.25m, however, you must opt out of the scheme as any further accrual will cause the protection to be lost. For members who have yet to maximum pensionable service, this could be problematic. Individual Protection (IP) will allow you to claim a personalised protection of the value of your pension pot on 6th April – up to a maximum of £1.25m. IP allows you to continue contributing and accruing. It will then only be that element of your pension pot above your personalised protection that will be subject to an LTA charge.
If the value of your pot is below £1.0m then protection may not be claimed.
If you are in any doubt as to the value of your pension pot currently, you should contact your force’s pension scheme administrator who will be able to provide you with this figure.