The lifetime allowance is being reduced from £1.25 million to £1 million from 6 April 2016.
Exceeding the lifetime allowance can have significant tax consequences:
- Lump sum withdrawals taken from the excess amount within your pension are taxed at 55%
- If you retain the excess amount within your pension fund, a 25% tax charge is made (and any income taken from the fund will be taxed at your marginal rate of income tax).
You can protect yourself from this potential tax charge but you need to make a decision before 6 April 2016.
The allowance applies to the value of your pension when you come to draw money from it (and not the value on 6 April 2016). This means that even if your pensions are currently worth less than the new £1 million limit, you could still be affected by the reduction. You may need to take action now even if you think the reduction doesn’t really affect you.
What action can you take?
There are two types of protection you can apply for:
- Fixed protection – You retain the higher £1.25 million allowance (although the protection is lost if any pension contributions are made from 6 April 2016 onwards)
- Individual protection – You retain a lifetime allowance based on the value of your pension as at 5 April 2016, subject to a limit of £1.25m. It is only available if your pension pots are worth at least £1 million, with this protection pension contributions can still be made. However, it is usually only appropriate where you can benefit in some way from future contributions despite the tax charge (such as where your employer makes contributions).
This is a complicated area of pension planning so we recommend that you take advice before taking any action.
Annual allowance being reduced for high earners
From 6 April 2016 the annual allowance for high earners is being reduced. The allowance of £40,000 will reduced by £1 for every £2 of income received above £150,000. The reduction is limited to £30,000, meaning anyone with income of £210,000 or more will have a £10,000 annual contribution allowance.
Additional rate taxpayers who already have pension savings above or close to £1 million in value may therefore wish to consider maximising their pension contributions before 5 April 2016 ahead of any application for fixed or individual protection next year. Again, we recommend that you take advice before taking any action.
If you have any pension queries or would like a pension review please call Sue Stephens.