Many UK pension holders will face hefty tax burdens when the pension lifetime allowance (LTA) drops from GBP 1.5 million to GBP 1.25 million in April.
Yet future retirees are failing to take action to protect their fund across the UK, even with the threat of facing charges as high as 55%.
LTA history
The LTA is the total amount a pension saver can save tax free.
Introduced in 2006, it was originally set at GBP 1.5 million, but was increased to GBP 1.8 million in the 2010 to 2011 tax year.
In 2012 it was reduced again, to GBP 1.5 million – the current limit – which is now set to be reduced for the second time to GBP 1.25 million.
The changeable nature of the LTA has lead experts to believe a further reduction after the 6th of April may not be far off.
How can I work out if I am near the LTA?
If pensioners believe they will not be affected, it is worth remembering that a medium-sized pension owned by an individual in their 30s or 40s could easily grow past the LTA in time.
The LTA encompasses the total amount of benefits in your pension.
For defined contribution schemes, you should work out if your fund will total over GBP 1.25 million by the time you are ready to take your pension income – including the effects of interest and your future contributions.
If you are not sure how these will affect your future pension total, you may want to seek advice from a financial advisor.
Next steps
There are two main options for a pension saver who would like to protect their fund against the LTA limit.
Applying for ‘Fixed Protection 2014′ to HMRC before the 5th of April would allow an individual to protect their fund against the tax.
However this protection comes at a cost – namely that a pension saver cannot add to their fund once fixed protection is in place.
For those living abroad, a transfer into a HMRC-recognised Qualifying Recognised Overseas Pension Scheme (QROPS) is another option.
Unlike fixed protection, a QROPS transfer does not bar future contributions, so a pension saver can continue to add and grow their fund as they see fit.
In addition, QROPS offer a number of other benefits, such as increased income drawdown, a 30% tax-free lump sum when the plan starts, the ability to receive pension income in the currency of the individual’s choice, and complete protection from UK income tax and inheritance tax.
A financial advisor can give advice on these two options and also highlight any other possibilities, based on the individual’s unique circumstances.
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