Protecting your pension fund when the lifetime allowance is cut

The lifetime allowance for pensions is being cut from £1.5m to £1.25m on 6th April 2014.

With this cut comes the need for individuals with larger pension funds or generous final salary pension benefits to consider their options for ‘protection’.

HM Revenue & Customs have announced a couple of ways in which those with larger pension pots can protect themselves from the impact of the lifetime allowance cut.

Because pension funds in excess of the new £1.25m lifetime allowance will be subject to a 55% tax charge, this is an important issue for all those with pension funds over a certain level to consider.

A factor of 20 is used to determine the capital value of defined benefit pensions; a final salary pension benefit of £62,500 is all it takes to reach the new lower lifetime allowance of £1.25m.

The two options on offer from HMRC for protecting your large pension fund are called fixed protection and individual protection.

Fixed protection

Fixed protection gives you the change to ‘lock in’ the original £1.5m annual allowance and benefit from this instead of the reduced £1.25m annual allowance when you take pension benefits.

The main drawback associated with fixed protection is that you can’t make any further pension contributions.

If you want to apply for fixed protection, the clock is ticking as the deadline is 5th April 2014.

Individual protection

The alternative is called individual protection.

This option allows you to continue contributing to your pension fund, although new contributions will be subject to lifetime allowance tax charges.

The individual protection route might still be attractive for those who get big employer pension contributions and cannot swap these for an alternative benefit, such as cash.

Individual protection provides you with a personalised lifetime allowance, up to £1.5m, which is based on the actual value of your pension fund or pension benefits as at 5th April 2014.

There is a three year time limit to apply for individual protection, until 6th April 2017.

Get advice

Deciding whether fixed or individual protection is right for you is rarely simple and you should seek professional independent financial advice to ensure you are making the right decision.

We worked with several clients when lifetime allowance protection was a major issue before, ahead of the big set of pension rule changes in 2006.

HMRC believe that this new reduction to £1.25m will have a much bigger impact on those saving for retirement than the previous cut to £1.5m, so we urge individuals with large pension funds or benefits to get in touch soon to discuss their options.

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