Updated 08 August 2017
A new pension ruling for April 2014 will implement a lower ‘lifetime allowance’ of £1.25m. So the clock is ticking to become tax efficient, have the most flexible retirement income strategy and avoid hefty tax penalties.
If you have a large pension fund or been a member of a pension scheme for many years, you probably face some big decisions before April. This is the date that a new so called ‘lifetime allowance’ (LA) of £1.25m comes into force, a reduction from the current level of £1.5m and far lower than previous limits.
“Regularly reviewing progress of pension pots towards the reduced allowance will become increasingly important after 2014”
Once you reach this amount, you have a choice either to continue contributions but pay tax on amounts above the £1.25m lifetime allowance under a regime known as individual protection, or if you are above £1.5m to stop contributing and apply for a different protection known as fixed protection. This will preserve the existing £1.5m allowance but means giving up future pension funding. This is a much tougher decision, especially if it means losing out on valuable employer contributions.
Experts estimate that the new pension rules will affect 360,000 people and many may not even know about it until it’s too late and face a large tax bill.
“Doing nothing, or making the wrong decision, could potentially cost you up to £137,500 in tax”
Doing nothing, or making the wrong decision, could potentially cost you up to £137,500 in tax. But for some, staying in their employer scheme and paying the tax charge might be the right choice, particularly if there are no other offers on the table from the employer should they leave the scheme.
The fundamental ‘protect or not?’ question is only the start. Can pension funds be boosted before April 2014? And if pension funding stops after this date, what are the savings alternatives? These are just some of the considerations to ponder.
But the clock is ticking…
1. Protect or not?
The biggest, strictly time-bound, decision is whether to register for protection or not. And, if so, which protection – or both?
2. Review investments?
The lower LTA can change the investment risk/reward equation. You may only get 45 per cent of any gain above their LTA (because of the 55 per cent tax charge), but still suffer 100 per cent of any loss!
This imbalance should be a catalyst to review your investment strategy, potentially de-risking it to reflect changed circumstances. You may even consider balancing this by taking more risk with non-pension investments.
3. Consolidate legacy pensions?
Regularly reviewing progress of pension pots towards the reduced allowance will become increasingly important after 2014.
This is easier if all the pensions are held in one place. And this can bring other benefits too – economies of scale, wider investment choice, more benefit flexibility and better wealth transfer options.
4. Where to save after April?
Those giving up on future pension provision may still need to keep saving for the life after work they aspire to – and to provide a buffer if plans don’t work out.
● Consider redirecting pension funding to your spouse, to make best use of both your allowances. Two pension incomes can be more tax-efficient than one.
● Also consider other tax wrappers such as VCTs (Venture Capital Trusts) for future savings to achieve the most tax efficient, flexible retirement income strategy.
April 2014 will be with us sooner than we’d like, so now is the time to seek professional advice on this complex subject.
● Decide whether to register for individual protection or fixed protection – or both.
● Act now to see if pension funds can be boosted before April 2014.
● Review your investment strategy.
● Consider consolidating legacy pensions.
● If you give up on pension funding after April 2014, investigate other savings alternatives.
Use the unbiased.co.uk tax waste calculator to work out how much more money you could be saving in tax.
About the author
Alan Smith is the CEO of Capital Asset Management. His specialisms include: wealth management, strategic financial planning and creative tax planning.
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