If your pension savings are projected to be valued in excess of £1.25 million by the time you reach retirement, then it may be appropriate for you to register for ‘Fixed Protection’.
Due to a recent change in legislation, the Lifetime Allowance is being reduced from 6th April 2014, and in order for you to avoid unnecessary tax charges, Fixed Protection has been introduced to enable you to retain the existing lifetime allowance of £1.5 million.
The following outlines the changes and explains what action you need to take:
The Lifetime Allowance
The lifetime allowance represents the maximum amount that you can save into pensions throughout your lifetime without suffering a tax charge at retirement. Currently, the Lifetime Allowance is £1.5 million.
Exceeding the Lifetime Allowance
If at retirement your pension savings exceed the Lifetime Allowance a ‘recovery’ charge is levied on the excess amount. The figure charged depends on how you decide to draw the excess amount:
- If it is paid as a pension income, the excess amount is subject to a tax charge of 25%. This is on top of income tax which is levied on pension income.
- If it is taken as a lump sum the excess amount is subject to a tax charge of 55%.
What is changing?
From 6th April 2014 the Lifetime Allowance is being reduced from £1.5 million to £1.25 million, which means that if your pension savings are likely to exceed the reduced limit by the time you reach retirement, you could be subject to a tax charge when you come to take benefits (as described above).
Things to Consider
There are various issues to consider when deciding whether you should be applying for Fixed Protection, including:
- How much do you have in pension savings?
- Are you making contributions into a pension?
- What might your pension savings be worth by the time you reach retirement?
- Do you already have a form of pension protection in place?
- Have you been or are you likely to be auto-enrolled into a company pension scheme?
- Are you a member of a Defined Benefits Scheme?
In addition, the Government has announced that it will be introducing ‘Individual Protection 2014’, which will be another form of pension protection and this will also need to be taken into consideration when reviewing your retirement benefits.
There is no simple solution to this aspect of planning as there are different options available which will suit different requirements, and these will be based upon your individual circumstances. If you are likely to be affected, correct decisions are vital to ensure you benefit from appropriate and tax efficient financial planning.
What can I Do?
The Government has introduced a form of protection from these excess tax charges, called ‘Fixed Protection 2014’.
By registering for Fixed Protection, you can retain a £1.5 million Lifetime Allowance after 6th April 2014, and it will not drop to £1.25 million.
What are the Restrictions?
To maintain your Fixed Protection, you must cease to be an active member of a pension scheme from 6th April 2014. This means that you can no longer make pension contributions.
If you do make a contribution after 6th April 2014, your Fixed Protection will be lost. This will result in your Lifetime Allowance reverting to £1.25 million and could incur financial penalties.
Please note, consideration should also be given to any occupational pension scheme of which you are a member (money purchase or final salary) as there are rules surrounding these types of pension in respect of Fixed Protection that need to be factored into the decision.
You should contact us for further details if you are a member of such a scheme.
What is the next step?
If you think your pension benefits are likely to exceed £1.25 million and you would like to discuss the merits and implications of applying for Fixed Protection, please contact us in order to discuss this in greater detail.
Please note that the deadline to apply for Fixed Protection is 5th April 2014, any applications must be received by HMRC before this date.
