Pensions Lifetime Allowance Reduction – will you be caught and have to pay a charge of 55%?
In two months the total amount you can hold in pension schemes – known as the pensions lifetime allowance – will be limited to £1.25 million per person.
This sounds a huge sum but HMRC estimate that 30,000 people will be hit immediately by this new limit and 360,000 people will breach the limit over the longer term. This limit was originally envisaged to hit only 1% of pension savers. The new limit will hit many more savers over the longer term.
You don’t have to be close to the limit now. Investment growth over 10 years of 6% per annum will mean that a fund of £700,000 will breach that limit. If you’re saving into pension as well, the likelihood that you will breach the limit becomes greater.
If you have a final salary scheme (defined benefit) the issue is more complex. If you have a final salary pension of £25,000, this will take up £500,000 of your allowance (20x). If your pension is enhanced every year, by inflation or perhaps by promotion, more allowance is eaten up. If you are saving into alternative personal pensions alongside, for example you have left or employment and started another career, you may inadvertently breach the cap.
What does this mean? Well there is a penalty if you go over the limit which is currently 55% of the excess. If you have protection in place for the old limit which was £1.5 million, the potential cost on the £250,000 reduction In the Lifetime Allowance is £137,500. But even going over the limit by £50,000 will cost £27,500.
Protecting your fund
There are protection measures that you can take if you are close to likely to breach the limit in the future. Those who are at risk of the 55% charge are:
- Those already over the £1.25 million limit with no existing protection. These pension holders should register for protection.
- Likely to exceed the limit even if pension saving ceases immediately. Registration for protection should be considered quite seriously.
- Likely to exceed the limit if saving into pensions continues. Protection is an option, but regular reviews should be carried out.
What should you do?
- A valuation of your schemes should be carried out and an assessment made of the potential of exceeding the lifetime allowance.
- Consider de- risking your fund, especially if close to retirement.
- Consolidate pensions to reduce the cost of regular valuations and appraisals.
- Establish alternative tax efficient savings and develop strategy for taking retirement benefits.
- Consider a wealth transfer strategy to your family.