From 6 April 2014, the maximum you can pay into your pension (the Annual Allowance) and the maximum limit on total pension benefits (the Lifetime Allowance ) are both reducing, which could result in unexpected tax charges.
However, there are steps you can take to avoid these tax charges and PR&W can help minimise the impact on you. We can also help you capitalise on any opportunities these changes present.
This pension update focuses on the reduction in the Lifetime Allowance.
What is the Lifetime Allowance?
The Lifetime Allowance is currently £1.5 million. It is the maximum limit on the total value of an individual’s pension benefits. Exceeding the Lifetime Allowance could result in a 55% tax charge on the excess.
From 6th April 2014, the Lifetime Allowance is reducing to £1.25 million, which is lower than than when it was introduced in 2006. The Allowance could be frozen for the foreseeable future and might even be cut again.
Who is affected?
Anyone with pension benefits exceeding £1.25 million will be affected. However, the change does not only potentially affect individuals with pension funds in excess of this figure, but also those with pension funds that are currently significantly less than the limit.
For example, a 55 year old with a pension pot of £700,000 at today’s date could very easily be affected at age 65. If no further contributions were paid and the pension investments grew at an average of 6% per annum, the fund value would exceed £1.25 million. Any excess over this figure could be subject to a 55% tax charge.
Members of Final Salary or Defined Benefit pension schemes could also be affected. When the Lifetime Allowance was £1.8 million, before it started reducing, the maximum Final Salary pension you could retire on without a tax charge would be £90,000 per annum, assuming no tax free cash is taken. From April 2014, the maximum pension will be £62,500 per annum.
What can I do?
Fortunately, with the right advice, you can take steps to reduce the impact of this change. The biggest, strictly time-bound, decision is whether to register for protection or not. The options are:
- Fixed protection 2014 – allows you to fix your Lifetime Allowance at £1.5 million, but means you must cease any further pension contributions
- Individual protection – allows you to protect your own individual Lifetime Allowance of between £1.25 million and £1.5 million and means contributions can continue to be paid, but only available if total funds exceed £1.25 million as at 5th April 2014.
Advice issues to consider include:
- Paying a final pension top-up before the shutters come down in April
- Reviewing your investments to mitigate the 55% tax charge
- Consolidating legacy pensions for easier policing
- Establishing an alternative (non-pension) tax wrappers for future savings
- Potentially taking benefits early
Please contact us to arrange an appointment with one of our financial planners.