I’m writing this month’s article at the end of January with the headline in the Times, “Wettest January on record as more rain sweeps in”! So why am I writing this now? I’m off to Tenerife to get some sun tomorrow and get away from the rain as it sweeps in and won’t be back until after the deadline for March’s copy.
Speaking of deadlines, on April 6th yet another change to pension legislation comes into force with the lifetime allowance (LTA) reducing from £1.5 million to £1.25 million. Thousands of pension savers could be impacted, if you could be one of those you need to act quickly and seek advice.
So how do I know whether I’m impacted? According to Standard Life, if you’re 10 years from retirement with a current pension fund of £700,000 you could exceed your allowance if your pot grows at 7% a year – even if you don’t pay another penny into it. Yet it’s unlikely you were even aware you had a problem. Of course, growth could be higher or lower depending on your investment performance and we don’t know what the allowance is likely to be in 10 years’ time.
The figure may sound high but many thousands of people could be affected, especially those in final-salary schemes who have built their entitlement through many years’ work.
If your pension savings are worth more than the LTA when you take your benefits, you’ll have to pay the LTA tax charge on the excess unless you have some form of LTA protection. The rate depends on how this excess is paid to you. If the amount over the LTA is paid as a lump sum – the rate is 55%, and paid as pension – the rate is 25%. Many people had built up pension pots worth more than £1.5 million before 6 April 2006 when the LTA was introduced. LTA protection was introduced so that they didn’t have to pay the LTA tax charge on pension funds built up before this date.
There are two ways you can protect yourself from paying the LTA charge. The most common is to apply for ‘Fixed Protection’, which effectively caps your LTA at £1.5 million.
The scheme, termed by HMRC as Fixed Protection 2014, allows savers with pensions likely to exceed the £1.25 million cap to apply now – before the deadline of 6 April 2014.
The second way to avoid the 55% tax penalty is to apply for ‘Individual Protection’. This option may be an attractive solution for individuals who will not receive any alternative remuneration from their employer if they opt-out of their pension scheme. Savers can apply for this protection from April 6.
If you are not sure whether you need protection ring our pension expert, Alan Brown, for a free initial consultation.
Lyndhurst Financial Management Limited
Authorised and Regulated by the Financial Conduct Authority