9 January 2012
In September 2011 we highlighted the fact that you should apply for fixed protection if your pension has a value approaching or in excess of the life time allowance which is currently £1.8 million.
To recap; if your pension fund has a value in excess of the lifetime allowance when you retire it will be subject to a recovery charge. This will be equivalent to 55% of the value of your pension in excess of your lifetime allowance.
The value of the lifetime allowance is to be reduced from £1.8 million to £1.5 million in April 2012.
If you apply for fixed protection you will secure a protected lifetime allowance of £1.8 million. This could potentially save you a recovery charge of up to £165,000. Unfortunately however, if you apply for fixed protection you must stop the accrual of pension benefits after 5 April 2012. If any contributions are made or if there is any relevant pension accrual after that date, you will lose your fixed protection.
This change may affect you even if your pension fund does not have a value close to the current or reduced lifetime allowances. For example, if your pension is currently worth £838,000 and you have ten years until your planned retirement, then was your pension fund to grow at 6% per annum it would use up all of your £1.5 million lifetime allowance without any further contributions being needed. Was this to happen any ongoing contributions would therefore only be of marginal benefit.
Where possible you should utilise the current higher lifetime allowance.
If the value of your pension could exceed the new lower £1.5 million lifetime allowance because of its size and/or the term to your retirement, you should consider making an immediate additional pension contribution then applying for fixed protection. The investment growth on your increased fund over the term to your retirement will hopefully ensure that you utilise all of your £1.8 million lifetime allowance.
Whilst in recent years tax efficient pension funding has been difficult due to the anti-forestalling rules, this is no longer the case. The new contribution rules allow tax relieved contributions of up to £50,000 per annum and as unused relief can be brought forward for up to three years, contributions of up to £200,000 can be paid this year.
This issue is complex and it is very important that you seek professional advice before making any decisions. If you would like to discuss how you could benefit from these rule changes then please contact UHY Financial Planning who will be pleased to help.
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