The total amount you can hold in a pension, called ‘the Lifetime Allowance’, will fall from £1.5 million to £1.25 million on 6th April 2014. Anyone with pension savings above this cap may face a 55% tax charge if they don’t take action.
If you think your pension will exceed £1.25 million, you can apply for protection from the fall in the Lifetime Allowance. There are two kinds of protection you may apply for:-
‘Fixed Protection 2014’ allows you to keep the current Lifetime Allowance of £1.5 million, but on the condition you make no more contributions to a pension after 5th April 2014. This includes employer contributions to a company pension scheme, and building up final salary scheme benefits.
‘Individual Protection’ is also available if your pensions will be worth more than £1.25 million on 5th April 2014. This allows you to keep a Lifetime Allowance of whatever your pensions are worth on that date, up to £1.5 million. So for instance, if your pensions are worth £1.4 million on 5th April 2014, individual protection will set your Lifetime Allowance at £1.4 million. While this may be lower than the Lifetime Allowance provided by fixed protection, you can continue to make pension contributions under individual protection.
Do I Need Fixed or Individual Protection?
If your pension savings fall below £1.25 million on 5th April 2014, then you do not have the option to apply for individual protection. In this scenario fixed protection will give you a Lifetime Allowance of £1.5 million, but only if you stop pension contributions. You therefore have to weigh up how likely you are to exceed £1.25 million at retirement and how much you value any employer pension contributions.
If your pension savings exceed £1.25 million on 5th April 2014, then the most appropriate form of protection will depend on the value of your pension savings, and whether you want to continue making pension contributions.
Generally speaking, the higher the value of your pensions on 5th April 2014, the more attractive individual protection looks, because it preserves a higher lifetime allowance, up to a maximum of £1.5 million. Similarly if you enjoy generous employer contributions to your pension, individual protection may look appealing because it allows you to maintain these contributions.
These contributions are likely to incur a 55% tax charge, because they will probably boost your pension above your individual Lifetime Allowance (unless you suffer investment losses and your fund value declines as a result). However you may take the view that getting 45% of these contributions is better than not getting anything at all, but be aware that any contributions you personally have to make to get your employer’s contribution are also likely to face the 55% tax.
How do I Apply for Protection?
The good news is you can apply for both kinds of protection, if your pension is worth over £1.25 million on 5th April 2014, but you aren’t sure whether you will want to make any further contributions.
You must apply for Fixed Protection by 5th April 2014, but cannot apply for individual protection yet.
What if I Already Have Protection?
Because this not the first time the Lifetime Allowance has been cut, you may already have some form of protection in place. If you do, you cannot apply for fixed protection.
If you have already have ‘primary protection’, you cannot apply for individual protection.
What Else Can I Do?
If you are thinking of applying for fixed protection, you may want to make a final pension contribution while you still can. Depending on how much you have contributed in previous years you could contribute as much as £200,000 to a pension by 5th April 2014. Depending on your tax band this contribution could cost you as little as £110,000 if you are a high-earning 45% taxpayer.
Consolidating pensions in a SIPP (Self Invested Personal Pension) can help you make managing them easier, in particular working out how much they are worth and whether you might hit the Lifetime Allowance.
If you apply for Fixed Protection you won’t be able to contribute any more to a pension, so make the most of other tax shelters. Primarily ISAs for yourself and your spouse, or look at Venture Capital Trusts if you are feeling more adventurous. You may also want to make pension contributions for your spouse and children, as these will still be available to you and will attract tax relief.
For bespoke pension advice on both the Annual and Lifetime Allowance contact Credencis.
We are situated between Derby and Nottingham but visit clients nationwide.
Credencis
“Live for today, Invest for tomorrow”