Last October the Government announced a reduction in the lifetime allowance – put simply, the amount of money you’re allowed to have in your personal pension fund – from £1.8 million to £1.5 million.
The majority of readers will switch off at this point because the figures simply don’t apply to them. However, if you are in that small band of people who have built up significant assets in their pensions, the changes could have far reaching implications. The Treasury has the power to increase the limit in future years but has so far given no indication that they are likely to do this. So long term financial planning becomes even more important for today’s high earners. What steps do you need to take? And how can we help you?
Previous pensions legislation allowed individuals whose pension funds exceeded the lifetime allowance to ‘protect’ their fund. HMRC has now introduced a new form of protection (known as ‘fixed’ protection, as distinct from the ‘primary’ and ‘enhanced’ protection that previously applied). This allows individuals to protect pension funds for the higher of £1.8m or the new standard lifetime allowance (SLA). Given that the SLA Is not expected to rise, this effectively means £1.8m – therefore if you believe that your pension fund could reach this amount, it is vital that you take action now.
Much of the media coverage of this change has focused on ‘city highflyers’ who have put their annual bonuses into their pensions. But it is important to note that the move will affect plenty of people in the public sector who have built up significant pensions through a combination of a high salary and long service. Doctors, GPs, senior police officers and civil servants – to give only a few examples – could all be affected.
For people retiring after April 2006, the notional value of your pension can be obtained by multiplying your expected annual pension by 20: if this calculation puts you anywhere near the proposed limit, we would strongly recommend speaking to us about protecting your pension.
Similarly, pension scheme administrators who have members in their schemes with funds that might reach £1.8m (and as above, for high earners in their thirties and forties that is entirely possible) should also take action. There is no point leaving yourself open to a claim from a disgruntled pensioner at some date in the future.
There are several conditions which need to be met for the new fixed protection to take effect – we will happily work through these with individuals and/or scheme administrators to help you make sure that the best possible pension benefits are obtained.
However, while meeting the conditions for fixed protection may be complex, there is some good news – the necessary paperwork is relatively simple, which is a welcome contrast to the complicated forms previously needed for primary and enhanced protection. This means that once you have decided that you do need protection for your pension fund, you won’t need to supply us with mountains of information. Again, this makes it sensible to apply for protection if you feel there is any possibility of your pension fund reaching the HMRC limit.
It is also important to note that the changes in legislation will have adverse implications for the amount of tax free cash that some individuals are able to take from their pension funds. Again we will be happy to discuss the figures with individuals and/or scheme administrators.
As we stated at the start of this article, the vast majority of people will be wholly unaffected by these changes. However, if you do believe that you could build up benefits in excess of £1.5m you should now think about registering for fixed protection. Similarly, some people who previously had protection for their pension fund but lost it may now have a second chance to put that protection in place.
With the possibility of people in both the private and public sectors being affected by this move, it is important to obtain expert and detailed advice from pensions specialists such as ourselves, and to act on that advice as quickly as possible.