Fido's still enjoying his walkies...
As you and Fido leave Tax Common you’ll enter Pension Forest. It’s a dark, dense forest full of lurking dangers, but you’ll need to negotiate it to get to the higher ground ahead. A few years ago a former Chancellor offered to cut down the Forest and burn some of the trees, but unfortunately it’s grown even denser since then. Such is the way of the woodsman.
If you’ve got a sizeable pension fund you’ll probably need some protection in the Forest.
There’s a concept called the Lifetime Allowance (LTA) that was introduced a few years ago which brought in a tax charge of up to 55% when you draw your pension if it exceeds the LTA at that time. From a starting level of £1.8 million the LTA has been progressively reduced, and will reduce again on 6th April to £1 million from its current £1.25 million.
This sounds a lot, but if you have a final salary pension its value is calculated as 20 times the pension at retirement, so a pension of, say, £30,000 a year equates to £600,000 towards the Allowance. Add on any AVCs or personal pension contributions you’ve made, then apply the effect of future growth and/or inflation until your retirement and you’ll see that the £1m limit may not be too far way.
If you’re in this situation you need to review your position now.
You can apply to protect your LTA at the current (£1.25m) level, and your application can be made after April, however you won’t be able to do so if you make any further pension contributions after this tax year. For some of our clients this has meant weighing up whether to stop contributing to a good scheme in order to apply for the required Fixed Protection.
Our Financial Planners are very familiar with the Pension Forest and can lead you successfully through it. You’ll need to remember that they will need to establish your whereabouts first, though, by looking at all of your existing pensions and carrying out the required calculations, so if you’re in this position you need to act now.