Lifetime allowance pension planning
Black Tower Financial Advisors looks at the recent changes to the lifetime allowance for pensions and some of the available solutions.
The lifetime allowance (LA) for pensions is being reduced and those with large pension funds may get caught out if they don't take appropriate action to protect themselves.
The latest changes to pension rules have not only reduced the annual allowance for making contributions to £50,000 per annum, but with effect from 6th April 2012, the lifetime allowance (the total amount of pension savings permitted per individual) will also reduce from £1.8m to £1.5m.
Who will be affected?
To judge whether or not someone is affected, firstly they need to value their total pension savings, and the method of doing this depends on the type of schemes they have. If pension benefits are held under a money purchase scheme, then you simply use the value of the fund. However, if they have a final salary scheme, the annual benefits need to be multiplied by a factor of 20, and added to any lump sums paid in addition to the pension.
George is 55 and has current deferred final salary benefits of an annual pension of £55,000 plus a lump sum of £165,000 (LA value £1,265,000). In addition, he has been self-employed for the past few years and paying into a SIPPS which now has a fund value of £225,000, bringing his total pension funds to a LA value of £1,490,000.
On retirement at age 60 his benefits are expected to provide an annual pension of £66,000 plus a lump sum of £198,000, which will total £1,518,000 for LA purposes. In addition, his SIPPS fund is likely to grow, perhaps to circa £315,000 even without any further contributions. So, George does have a problem with the reducing LA, but what can he do about it?
Those whose pension funds are likely to be more than the proposed new LA of £1.5m, can apply for 'fixed protection' from the change, and retain the higher £1.8m allowance. The value of their existing pensions does not have to be above £1.5m now to apply and they do not need to provide a valuation with their application. By doing this they are agreeing to be bound by certain conditions.
Broadly, this means that they cannot contribute to any pension schemes after 5th April 2012, and the value of a final salary scheme fund cannot increase by more than a reasonable percentage (defined by the scheme rules) or by the annual change in CPI if not specified.
However, securing fixed protection is not binding, and can be revoked at any time in future, should it become beneficial to do so.
If your pension funds are valued at more than your LA when you start to draw pension benefits, you will suffer a lifetime allowance tax charge. The rate of the tax charge depends on how you draw the excess benefits, and is either 55% if taken as a lump sum, or 25% if taken as income.
There are therefore some very important factors and options which need to be considered now to plan for the LA change.
- Should fixed protection be applied for? Any claim must be made by 5 April 2012 although we would advise not leaving it to the last minute.
- Should one maximise contributions for 2011/12, perhaps taking advantage of the carry forward allowance?
- Should early retirement be taken? If so, what is the affect of this and which scheme or schemes should be taken early?
- How should benefits be taken? Is it worthwhile crystallising money purchase benefits without drawing a pension?Should benefits be transferred, for example from a final salary scheme to a money purchase arrangement, to reduce the total LA value of the pension funds?
- Should money purchase benefits be restructured to address likely future investment returns and risk if there is a chance of breaching the LA?
Those that are affected need to seek professional and independent advice to judge their liability and what should be done.
We have developed a specialist LA Analysis Service to help assess our clients' positions in respect of the reducing LA, and advise what action to take.
For further information, please contact Chris Bruce, Blacktower Financial Advisers Ltd on firstname.lastname@example.org, 020 8336 6350 or visit the website http://www.bfa-uk.com
Blacktower Financial Advisers Limited is authorised and regulated by the Financial Services Authority. The views stated within this article do not constitute advice, are for guidance purposes only, and are based upon Blacktower Financial Advisers Limited's understanding of current legislation, which is subject to change. Actual personal taxation will depend upon individual circumstances.