Will you be affected by the Lifetime Allowance on your pension fund?
You may have seen a number of articles recently on lifetime allowances. The note below outlines the rules associated with the allowances and we stress that the best way forward if you feel that it may affect you is to seek advice.
The lifetime allowance was brought in by the Government to limit the size of your overall pension pot at retirement, and if you exceed the allowance you can end up paying a tax charge of up to 55% on the excess fund.
The Lifetime allowance was originally set at £1.5 million, increased up to £1.8 million and has subsequently been reduced to £1.5 million. It is due to be further reduced to £1.25 million from 6 April 2014.
Anyone that builds up a fund that is likely to be more than £1.25 million could end up with a punitive tax charge. This tax will catch an estimated 30,000 people and more people will be caught than realise.
There are ways of protecting your pension fund. For example, under Individual Protection, if your pension is worth more than £1.25 million, you can protect it at the current level (up to a cap of £1.5 million) so as to avoid the reduced allowance of £1.25 million. You have until 5 April 2017 to apply for this type of protection and you can continue funding the pension as usual.
Alternatively you can apply for fixed protection if you think that your fund will exceed the new lower limit of £1.25 million. This would mean your lifetime allowance is protected at £1.5 million however it does mean that you cannot make any further pension contributions after 5 April 2014. This protection must be applied for by the end of this tax year.
For all individuals the key question is to try and work out if your fund will be worth more than the £1.25 million in the future. We have run some figures and an individual with a fund of £600,000 now and with 15 years to go until retirement would likely exceed the £1.25 million limit if their fund grew at just 6% per annum.
It will affect those people with final salary benefits even more as these are valued at 20 times the annual pension due, and this figure would then be added to any money purchase arrangements. Death benefits under a Death in Service Scheme may also be counted as part of the Lifetime Allowance.
The key thing is to take advice. We have more detailed information and will happily give you a view of your current pension arrangements and whether we feel they might exceed the limit, so that you can plan with confidence.