Despite having a reduction to the maximum permissible funds that could be built up in a pension scheme from £1.8 million to £1.5 million just over one year ago, the Chancellor has recently announced that the pension lifetime allowance (LTA) will reduce to £1.25 million from 6th April 2014. We await the final notification that will govern this change, but it looks likely that larger pension funds could pay as much as £137,500 taxation because of these changes, if they do not take action.
Advice surrounding the new rules is likely to be complex due to the range of protections available, the potential to also be incurring annual allowance charges, and the wide variety of different pension benefits that an individual may have accrued. Nevertheless, simply, those that continue to pay into pensions after the 6th April 2014, and do not opt for any form of protection, will find their lifetime allowance reduced to £1.25 million. For those in Final Salary pension schemes this could be as much as £62,500 pension per annum (a 20x applies) and for those in Money Purchase Schemes many individuals will be unable to build up benefits more than the £1.25 million. Many death in service pension schemes will be added to this allowance making it increasingly easy that the 55% tax recovery charge will apply at retirement, age 75 or death.
There are ways to avoid this tax, the most simply and commonly published being fixed protection 2014, though due to the need to stop pension accrual this may not be in everyone’s interest. Having advised individuals the last time around (in 2012) we offer a clear, fixed fee service that can help you to identify the nature of your benefits, whether they are likely to achieve your lifetime goals, and whether you should be taking action to avoid the above tax charges. This advice is complex and often the analysis will indicate the advantages and disadvantages of any course of action, rather than making a firm recommended solution. If you would like to speak to us in regards to this or any other pension related matter then we will bear the cost of an initial telephone conversation, Alistair Cunningham is available on 0844 815 7002.