Wednesday, 17 February 2016

Protecting your pension from the Lifetime Allowance Reduction

From 6 April 2016, the lifetime allowance (LTA) for pensions will reduce from £1.25m to £1m and this could potentially affect a significant number of savers according to a recent article in the Financial Times. Figures suggest that if you earn £80,000 or more, or have saved funds of £600,000 or more into your pension, you should consider action to protect your self from the LTA danger zone. Any savings in excess of the LTA will incur a tax charge of up to 55% when LTA is triggered on the withdrawal of funds.
If you think that you may breach the £1m limit during your working lifetime, e.g., you are a high earner or have a defined benefit (final salary) pension, it is a good idea to check the value of your pension to date and request projections to see how your selected retirement age and investment growth will affect that value. If you have only money purchase pensions (as opposed to a defined benefit pension), it is simply a matter of determining whether your pension fund is likely to be valued in excess of £1m by the time you draw benefits (you also need to consider any pension benefits you have previously begun to draw). You will need to take into account the likely fund growth and future level of pension contributions, but an adviser can do that for you. However, if you have benefits within a defined benefit pension scheme (deferred entitlement or benefits still accruing) it can be more complicated because these types of pension benefits are calculated on a percentage of your salary at retirement. If you are entitled to a lump sum in addition to the pension, you will also need to add this.
The government does have arrangements in place to offer some protection to savers and it may be possible for you to apply to HM Revenue and Customs for either Fixed Protection or Individual Protection, both of which can both help to reduce or eliminate an LTA tax liability. However, these protections come with conditions and the best course of action for you will depend on various individual factors and should be considered very carefully.
The LTA is a complex area, and the right solution for you will depend on your personal circumstances. Seeking independent advice will ensure that you make the right decisions in good time. If you would like more information on the LTA reduction you can read more in the LTA policy paper or ask your financial adviser.