Nearly two months to go until the lifetime allowance on pensions will be reduced from £1.5 million to £1.25 million.
The lifetime allowance is the maximum amount of pension saving you can build up over your life that benefits from tax relief. If you accumulate pension savings worth more than the lifetime allowance, you will have to pay a tax charge on the excess. On the 6th April 2014, anyone who has a pension pot bigger than £1.25million will be hit with a tax charge of up to 55% when they come to take their pension.
If an individual has a pension pot worth £1.5million, they could be given a £137,500 tax charge if they take the money as a lump sum. If they decide to take it as an income, the charge will be at 25%.
From April 2014, there will be two new protection vehicles made available to help avoid the lifetime allowance charge. The scheme ‘Fixed Protection 2014’, allows pension savers who are likely to breach the £1.25m cap to apply before the April 6th for an extension to the limit. The application can be made online via HMRC’s website or by post. The protection will benefit those near to retirement and wanting to maximise the value of their pot or those who believe their pensions will grow without making contributions.
The second way to avoid the 55% tax penalty is to apply for ‘individual protection’, which is currently being fine-tuned by the HMRC and details will be announced shortly. You can use this tool to check whether to apply for fixed protection 2014 and / or individual protection 2014.
The decision to take protection is not as straightforward as it may seem. With only two months to go, seeking financial advice is crucial to discuss the best options available, especially if you have grown multiple pension pots of the years. Pension savers who believe that they will be hit by the reduced allowance will need to gather current values from all their pension providers.
If you have any questions regarding your total pension value, please speak to Retirement and Investment Solutions.