Individuals with significant pension reserves could be in for a shock in a couple of months if they don’t take time to understand how imminent changes in the regulations that apply to pensions are going to affect them.
There is a limit to the total amount that pension savings can grow in a lifetime and remain tax free. From April 5 2014, there will be another reduction in this Lifetime Allowance from £1.5 to £1.25 million making it 30% lower than at its peak in 2011.
A limit that remains as large as £1.25 million may not ring alarm bells for the majority of us. However, we must not ignore the potential for pension savings to grow substantially over time through the effect of compounding. For example, if growth rates averaged, say, 7% pa then an individual with just 15 years to retirement need only have pensions valued now at £455,000 to exceed the limit by then. It is particularly relevant to members of occupational pension schemes because of the way that such pension benefits are valued.
The significance of this is pension savings exceeding the allowance will be taxed at a punitive 55%. The £250,000 reduction will therefore cost some tax payers £137,500 in extra tax, unless they take appropriate action.
There are two protection options that allow pension savers to lock into the current, higher level of Lifetime Allowance beyond April 5 2014. Fixed Protection 2014, must be applied for by April 5 2014. It is only available to those who do not retain any earlier forms of protection and it does come at a cost. This cost is that no further pension contributions may be made (and benefit increases are limited for defined benefit schemes). The second option, individual protection, will be available from April 6 2014 and gives individuals who have total pension rights in excess of £1.25 million as of April 5th 2014 a fixed lifetime allowance capped at £1.5 million. Should this become legislation individuals will have to be registered by April 5 2017.
This change is important for more people than might be expected. For these, electing for appropriate protection will save a very large amount of tax. This next six weeks provides a window of opportunity in which to review pension plans with an independent financial adviser, regardless of the size of your current pension funds. After all, most of us need to be saving more towards our retirements – and keeping that free from unnecessary tax charges will help.
The above information is provided on our understanding of current HMRC tax rules 2013/14. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
For further information contact David Clifton, chartered financial planner at Francis Clark Financial Planning Limited on 01872 276 477 or Email: firstname.lastname@example.org
Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. More information is available at www.fcfp.co.uk
Francis Clark Financial Planning is a trading style for Francis Clark Financial Planning Ltd. which is authorised and regulated by the Financial Conduct Authority. Registered Office: Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF. Registered in England No. 05413603 The Financial Conduct Authority does not regulate taxation advice.