Cast your mind back to early April 2006 – Scotland were still celebrating recapturing the Calcutta Cup with a Six Nations win over England and even more excitingly the UK pension system was facing its biggest overhaul ever with the introduction of ‘pension simplification’. As part of this simplification process, pension savers were about to be subject to a pension lifetime allowance (LTA) for the very first time.
The LTA, which limits the amount you can save in a pension and receive tax relief on during your lifetime, was introduced in April 2006 at £1.5m and soared to what now appears to be a very generous £1.8m by 2010. Since then the LTA has declined and from April this year it will be just £1m (rising in line with CPI from April 2018). A breach in the LTA could result in a tax charge of up to 55% when funds are withdrawn from your pension.
If you are reading this thinking, “this won’t affect me, I have nowhere near £1m in my pension” don’t be too hasty to click the X in the top right-hand corner before considering this example:
– a 35 year old (with no current pensions) who starts saving 15% of their £55,000 salary into a money purchase pension, receiving modest investment growth of 5%pa, will breach the LTA by their state pension age of 67.
We aren’t suggesting that younger savers with smaller pots need take any immediate action, we merely aim to point out how easily a long-term disciplined pension saver could breach this allowance. However, savers with larger pension pots close to or already over £1m (without any existing protections) need to carefully consider what actions to take immediately to protect themselves. One or a combination of the following options should be considered:
- Fixed Protection 2016 – available to anyone regardless of pension value, a successful application would result in retaining the current higher LTA of £1.25m, but no further pension contributions can be made.
- Individual Protection 2016 – available to those with pension values in excess of £1m at 6th April 2016. A successful application gives you a personalised lifetime allowance equal to your pension benefits but is capped at £1.25m. The benefit of this protection is that you can continue to contribute to pensions, but be careful as these contributions could be subject to the LTA charge.
- Redirect contributions to other tax-efficient investments like ISAs.
- If you are lucky enough to receive an employer pension contribution (without the proviso to make one personally) then consider funding over the LTA. A 55% tax charge on ‘free’ money is still worth something!
If you would like to discuss your financial planning options, please contact us with any questions you might have. You can do this by calling our head office on 0131 220 0000, or by emailing us at firstname.lastname@example.org. or you can also follow us on Facebook, Twitter or LinkedIn.
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