18 Sep Pension Advice – Are you affected by the lower Lifetime Allowance now, or in the future?
The limit on how much you can save tax efficiently in a pension is being reduced again with effect from 6th April 2016.
Prior to April 2012 you could have up to £1.8m in pension provision without the risk of any ‘unauthorised payment charge’ being incurred (at 55% this is a heavy penalty). The government has reduced this twice already to £1.25m, but there is now a third reduction to £1m with effect from April 2016.
So if you are lucky enough to have total savings held in authorised UK pension arrangements totalling over £1,000,000, and you have no ‘protection’, then you will incur a 55% tax charge on the excess when you come to take your benefits.
This will effect more people than at first thought. For example, if you are in a Final Salary/Defined Benefits pension scheme and expect to have full service (normally 40 years service) and a salary of £75,000 at retirement, then your pension is likely to be £50,000 and the equivalent fund value will be £1m. This is because Final Salary pensions are multiplied by 20 to give the “equivalent value” which is tested against the Lifetime Allowance.
Another example is someone with £100,000 final salary with 30 years service (30/60 x £100,000 = £50,000 pension; £50,000 x 20 = £1m value).
The good news is that it is possible to ‘protect’ any current high values that exceed the £1m value (up to the current Lifetime Allowance of £1.25m).
Even if your pension values are currently below £1m, if you are still contributing to a pension scheme, or accruing extra benefits under a Final Salary scheme then if your salary is a good one, or if your existing arrangements have a significant value, you should review matters every year to ensure you do not exceed the limit.
Even if you are due to exceed the limit, it may still be beneficial to pay the 55% on the excess, if there are no better alternatives and the cost is borne by your employer (though your employer may be willing to consider alternative methods of remuneration, or a change to working terms & conditions rather than paying money of which 55% will go to the taxman).
For financial advice on pensions, retirement, investments or general financial planning, please contact us at Astute Money Management Ltd to discuss if we can help you (visit us at www.astutemm.co.uk or call 01202 263856).
Author: Daniel Weldon, Financial Advisor & Director at Astute Money Management Ltd