For most clients of Green Financial - and that is who this blog post is for - , given the
conversations we’ve had about your circumstances in the past, and your current
pension status and value, I don’t think this should be a concern for you. The
financial planning we have discussed means that the wider strategies I mention
at the end of this document and the other tax efficient work we’ve been doing together
should mean all is OK. However, if you’d like to discuss one of the pension
protections, please contact me before the end of February.
Please do have a
read of the following. Apologies for the length, if you’d rather call me,
please do.
The headlines scream “Hundreds
of thousands of pension savers in the UK risk being hit by hefty taxes as a
result of the latest cut in the pension Lifetime Allowance (LTA). They are
being urged to take urgent action to protect their pension pots, which are
worth an estimated £250 billion.”
There’s no underestimating the importance of saving into a pension
and for many of my clients, the amount they save will not reach the lifetime
allowance. However for those who have contributed a significant amount towards
their pension or are fortunate enough to have a defined benefit scheme
(normally one or more old company final salary schemes) with a long service record could
unknowingly discover they could be at risk of exceeding the LTA. In theory, failure
to take out the necessary protection could lead to an unexpected tax bill of
£137,500, although that does tend to be an alarmist worst case scenario figure
for most people.
The LTA, introduced in 2006 as part of pension reform and
simplification, is the limit on the amount of money an individual can save into
their pension schemes before incurring a 55% tax charge.
When the allowance was introduced on ‘A Day’ (5 April 2006) the
powers that be pledged to maintain its real value. This was the case until 2011
when the LTA peaked at £1.8 million. Since then, however there have been
several changes to the allowance.
This April (2014) the LTA will be cut to £1.25 million from the current
level of £1.5 million. The powers that be say this will affect as many as
360,000 pension savers by the time they reach retirement. I just want to make
sure you are not one of those 360,000.
As above, given
the overall planning we are doing and your current pension/retirement income
aims and status I don’t think you should have cause for concern but please
contact me if you’d like to discuss or double check, especially if you have old pensions that I don't advise on or manage with you.
If you read further in this blogpost, you'll see there is more info on the LTA
and the other things we do with financial planning that mean this probably
won’t be an issue for you.
If you’d like to have a look at your own figures on a calculator,
Standard Life, a pension provider have a web page:
There are others, and your pension provider may have their own page - the one above is just pretty simple and quick to use, hence its inclusion here.
Or just contact me and I’ll do the projection with you / for you.
Further Info
Protecting your allowance
There are two new protection options for 2014, allowing pension
savers to lock into the current, higher LTA of £1.5 million beyond 5 April
2014. These are known as ‘Fixed Protection 2014’ and ‘Individual Protection’.
The best option for somebody might be to elect for either, both, or even
neither. The optimum course of action will of course depend on your individual
circumstances.
Fixed Protection 2014 allows pension savers to keep a £1.5 million LTA beyond 2014. This
option is available to anyone who doesn’t have any of the earlier forms of
protection (such as Enhanced, or Primary).
However there is a trade-off involved in securing this particular
protection: Pension contributions to Defined Contribution (DC) schemes (such as
your wrap SIPP) have to stop after 5 April 2014 while any increases in Defined
Benefit rights can’t exceed a given ‘relevant percentage’ (normally CPI for the
previous September) in any tax year.
The deadline for fixed protection applications is 5 April 2014.
Individual Protection is available only to people with pension savings worth more than
£1.25 million on 5 April 2014. This gives individuals a personal LTA equal to
their benefit value on 5 April 2014 (up to a maximum of £1.5m).
So someone with pension savings worth £1.36m on 5 April 2014 can
lock-into a personal lifetime allowance of £1.36m. But someone with savings
worth £1.55m would only secure a £1.5m allowance.
Crucially, this
protection comes without the trade-off needed for fixed protection. Individuals
in this category can keep funding their pension after April 2014 if they want
to (or, perhaps more importantly, continue to enjoy pension funding from their
employer). So, for individuals whose funds already exceed £1.5m by April,
individual protection gives a better deal than fixed – a £1.5m LTA with no
requirement to give up on future pension saving.
Smarter saving: wider strategies
I’ve long maintained that whilst pensions have benefits, there are
also drawbacks. That’s why pensions have long been just one of the ways I help
clients financial plan. If you are compelled to give up funding your pension as
a condition of lifetime allowances you will likely still want to invest money
somewhere. Luckily there is a wide choice of suitable alternative investment
vehicles, and tax wrappers, available, many of which we already use.
Several strategies merit close consideration.
Use spouse’s pension: High net worth individuals should consider contributing to a
pension for a spouse or civil partner. This is particularly valuable for a
working spouse, as you can pay up to the higher of 100% of the spouse’s salary
or £3,600 (less any contribution already being made by the spouse). The spouse
will receive tax relief on the contribution. And the ‘gift’ will be covered by
the spouse exemption for Inheritance Tax.
Maximise tax allowances: Realising capital gains on mutual funds on an annual basis
ensures that you maximise the benefit of your annual exempt allowance for
Capital Gains Tax (CGT) and the Income Tax Personal Allowance. If these are not
used every year then they are lost and gone forever.
Utilise gaps in tax wrappers: If there are gaps in your use of tax wrappers, redirecting money
that can no longer be saved in a pension could prove an ideal opportunity to
address this.
Defer tax offshore: Tax deferred can mean tax saved. If you are a higher rate taxpayer
now, it can be tax-efficient to invest through an offshore bond. You will not
pay tax until funds are taken from the bond, allowing for planning such as
taking gains when paying less tax in retirement, or assigning to a
non-taxpayer.
Spread tax
exposure: Diversifying your
investments across assets that are subject to income tax and those that are
primarily subject to capital gains tax puts you in a potentially better
position to weather any variations.
For most clients,
we include any of the above which are relevant in our general planning. Let me
know if you’d like further info on any of them as it relates directly to you.
Please remember the usual regulatory warnings:
PLEASE don't take this blog post as personalised, specific, financial advice for you solely reading it - it isn't! - it's a generic blog post, with the aim of giving you a little info on some upcoming changes, which - if you are concerned affect your own situation - you can contact me or do further research yourself.
The value of investments can go up or down and may be less than
what was paid in. Returns are dependent on investment performance and are
therefore not guaranteed.
Tax rules and legislation can change and any information given is
based on our understanding of law and current HM Revenue and Customs practice
