How to avoid being caught out by reduced pension allowances

Top tips on pensions
Picture: Esme AllenPicture: Esme Allen
Picture: Esme Allen

1 What’s changing?

From 6 April 2014, the pension lifetime allowance (LTA) will be cut from £1.5million to £1.25m. HMRC estimates that 30,000 people will be immediately affected, and the consequences of breaking the limit are significant.

The LTA is the maximum amount of pension savings you can build up over your life that benefits from tax relief. If you build up pension savings worth more than the LTA you’ll pay tax on the excess at potentially 55 per cent.

2 Who’s at risk?

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A £1.25m limit may not set alarms bells ringing for you just yet. But with a frozen allowance a distinct possibility for those within sight of retirement, you don’t have to be close to £1.25m now for it to become a problem – investment growth can quickly inflate the value of your pension.

If your pension pot is already above £1.25m, with no existing protection, you need to register for protection and consider what kind of protection you need.

Similarly, if your pension pot is at risk of exceeding £1.25m at retirement– even if pension saving stops now – you need to review your pension urgently.

3 OK, I’m at risk. What are my options?

There are two new protection options to allow anyone caught by the reduction to lock into a higher LTA – “fixed protection 2014” and “individual protection”. The best option for you might be to elect for either, both, or even neither.

Making the wrong decision could potentially expose up to £250,000 of your pension savings to a 55 per cent tax charge.

4 Other questions to ask an adviser:

Aside from the fundamental ‘protect or not’ question, the potential need to cease or cut back on pension saving after April 2014 raises a host of other questions you should consider, including:

• Should I pay a final pension top-up before the shutters come down in April?

• Is it worthwhile reviewing my pension investments to de-risk them and mitigate the potential 55 per cent tax charge?

• What about my legacy pensions?

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Should I consider alternative (non-pension) tax wrappers for future savings?

• What strategies should I employ for wealth decumulation?

• What is the most efficient way to transfer wealth to the family?

• How will the new pension rules announced in the Budget affect me?

Kevin Garfagnini is director at Mazars Financial Planning