Protect your pension fund from a potential 55% tax charge
Review the traps and our subsequent tips to protect your fund from changes in tax laws. Currently the ceiling for lifetime pension savings which qualify for tax breaks stands at £1.5m, after a reduction in 2011 from £1.8m. A further reduction was on the cards and has now been confirmed to 1.25m, coming in from 5 April 2014.
These figures refer to what is known as the lifetime allowance (LTA).
OK, I hear you say, “That is still a lot of money!” …and, for some, it is. If you are fortunate enough to have a pension fund in excess of the new proposed limit of £1.25m then it is still great news! However, if proper planning is not considered now, 2014 could see anyone with pension funds at this level, being taxed at a whopping 55% for the excess in their pot!
So what does this mean for my pension?
Pension funds that are currently over £1.25m
- Will qualify for “fixed protection” (FP) scheme – where funds of up to £1.5m will be protected from the 55% tax charge
- TRAP – FP will be lost upon joining any new pension scheme and/or making any new contributions
- TRAP – FP will be lost if auto enrolment (compulsory inclusion in an employer’s pension scheme) applies
- TIP – this can be avoided by opting out of the pension scheme within 1 month of being signed up
Pension funds in-between £1.25m and £1.5m
- TIP – Consider topping your pension up to £1.5m before 5 April 2014 so you can protect the maximum amount under a FP scheme.
Pension funds below £1.25 million with growth potential
If your pension is currently below £1.25m but you are still saving and funds are likely to exceed the new limit either by growth or further contributions, you may be eligible for “individual protection” (IP), which, although full details have not been confirmed, is likely to consist of a personal LTA to cover the pension fund as it stands on 6 April 2014 and further protection up to a limit of £1.5m.
All in all, this requires some proper planning and financial advice.
- IP is available from 6/4/2014
- Applications must be made by 5/4/2017
- FP is available now – from 1/8/2013
- Applications must be made by 5/4/2014 – so get in touch with your financial adviser (or us if you don’t have one) if you think this may apply to you.