In July 2015 a further reduction was announced in the lifetime allowance. This is the total amount you can hold in pensions savings without incurring an additional tax charge. The allowance was reduced from £1.25 million to £1 million on 6 April 2016, although it will increase with inflation (CPI) from 6 April 2018 onwards.
Exceeding the lifetime allowance can have significant tax consequences. For example, if you go over the allowance by £100,000, this amount will be taxed at 55% if you withdraw it as a lump sum. Alternatively, it the £100,000 is kept within your pension pot, a 25% tax charge is made (and any income taken from the fund will be taxed at your marginal rate of income tax).
The allowance applies to the value of your pensions when you eventually come to draw money and not their current today. This means that even if your pensions are currently worth well short of the new £1 million limit you could still be affected by the reduction. For example, if a pension pot worth £600,000 today grows at 5% pa, it will exceed the new limit in just 11 years.
The government however will allow people to protect their pensions savings in two ways:
- Fixed Protection – this allows you to retain the existing £1.25 million allowance, although you will lose the protection if any pension contributions or accruals are made from 6 April 2016 onwards.
- Individual Protection – this allows you to retain a lifetime allowance based on the value of your pension as at 5 April 2016, subject to a limit of £31.25 million. It is only available if your pension pots are worth at last £1 million as at 5 April 2016. The advantage of this protection is that pension contributions can still me made. However, it is usually only appropriate where you can benefit in some way from future contributions despite the tax charge (such as your employer making contributions.)
You will be able to apply for these protections in the current tax year ended 5 April 2017. However, it is important to consider what actions you need to take now.
If you think you may be affected, please give Sue Stephens a call.
