Pensions – The Lifetime Allowance cut April 6th 2014

Don’t snooze or you might lose. (OK I know pension rules are a tad dull but read on it’s important.)

The Lifetime Allowance is being tinkered with again! A year ago it was announced that the pensions lifetime allowance will drop at the end of the (current) tax year 2013-14 from £1.5million to £1.25 million. Remember, if you exceed the allowance, the excess is liable to be taxed at 55%.

Many more people are going to be affected by this than the Government suggests – a major pensions company estimates 360,000+.  Who  should care? Well, for starters anyone with aggregate pensions  (including final salary) currently valued at more than £1.25 million who hasn’t any existing protection from HMRC.  But also anyone in danger of getting close to that limit in the years to come (don’t expect Government to put it back up again anytime soon). The graph below shows the LTA since inception in 6/4/2006 (“A-day”) and perhaps suggests a trend (source = Standard Life):

Pensions Lifetime Allowance LTA chart

Lifetime allowance 2006 to date

Who’s in danger of falling foul of the latest rule change then? Well, of course it depends on how much aggregate pensions you have now, what your current funding level is and how long to go until your likely retirement date – but some simple maths produces the following table as a guide for members of money purchase schemes (i.e.  group personal pensions, occupational money purchase schemes, executive plans, RACs (S226s), S32s, i.e. anything not final salary) as follows:

Fund level now (without further contributions) to achieve £1.25 million
Years to Retirement Fund now growing at 4% Fund now growing at 6%
3 £1,111,245 £1,049,524
5 £1,027,409 £934,073
7 £949,897 £831,321
10 £844,455 £697,993

And that’s assuming you make no more contributions to any plan!

Likewise for those lucky enough to have a defined benefit (final salary) pension (the calculation is 20x the annual benefit, so £62,500 per year is where it max’s out):

(Deferred) Annual Final Salary Pension level now to achieve £1.25 million
Years to Retirement Pension revaluing at 3% p.a. Pension revaluing at 4% p.a.
3 £57,196 £55,562
5 £53,913 £51,370
7 £50,818 £47,495
10 £46,506 £42,223

The table above assumes you’re no longer an active member of the scheme / adding years!

Don’t forget to aggregate your money purchase and final salary pots together.

What to do?

There are two new options to lock into the current higher allowance:

“Fixed protection 2014” allows clients to lock into the old £1.5m allowance beyond 2014. The down-side is that pension savings have to stop after 5 April 2014. You must apply for this by 5 April 2014.

“Individual protection” is only available to clients with pension savings worth more than £1.25m on 5 April 2014. It gives a personal allowance equal to that benefit value on 5 April 2014 (i.e. up to £1.5m), and importantly it doesn’t mean giving up on pension saving. You must apply for this by 5 April 2017.

It’s a complicated issue though and might require regular monitoring of all your pension accounts.  There are many potential angles to this and not all are obvious. For example, maybe you think you’re a marginal case? Well perhaps de-risking your pension investments works for you – e.g.  if  a steady lower risk, lower return portfolio probably keeps you below the limit, but a higher risk approach (always assuming it does achieve higher returns)  is likely to take you over it – in which case do you really want to take risk chasing higher returns  when the Government stands to get most of the benefit? Just one example of things to think about.

The simple message is get to advice from a good independent pensions adviser   …………..(hmmm… Oh! Hello …… ) if you are in any way concerned about this. We can look at various scenarios and discuss solutions and the alternatives which suit your particular circumstances and give you the best results when you do actually retire.