Changes to the lifetime pension allowance
IN LESS than two months the lifetime pension allowance, i.e. the maximum value that can be accumulated within all pensions before incurring an exceptional tax charge, will fall from £1.8m to £1.5m.
If the total value of all an individual’s pension schemes exceeds this amount, the surplus will incur an exceptional tax charge of 55 per cent, or 25 per cent, depending on whether the individual draws his or her benefits as a lump sum or as income.
Those who already have pension savings of £1.5-£1.8m, or who expect to breach the £1.5m new allowance by the time they draw pension benefits, can seek protection as long as they take action before 5 April 2012 – so investors need to act quickly.
Time is of the essence – the first thing on anyone’s checklist should be to calculate the value of any money purchase or defined contribution pension savings by asking your pension administrator.
However, the next step of working out the valuation of final salary or defined benefit schemes can be more complicated. HMRC calculates this as being the income that you would be entitled to multiplied by 20. Therefore, an income of £50,000 would carry an equivalent fund value of £1m. So if you have final salary benefits, these could significantly increase the total value of your pensions.
It is also worth bearing in mind that anyone who already holds primary protection or enhanced protection for their pension savings is not entitled to fixed protection, and the protection already held will continue to apply. Take action:
● HMRC will grant fixed protection to members who want to protect themselves from this reduction in the lifetime allowance.
● There are conditions attached to this protection, the main one being that no further contributions be made by you or on your behalf.
● While fixed protection does impose additional restrictions on your pension, you are still able to transfer existing money purchase or defined contribution savings into your self-invest personal pension (Sipp).
Catherine Penney is vice president of Barclays Stockbrokers.