To Fix or not to Fix?
Those with significant pension assets should take action in advance of the changes in pension legislation coming into effect from 6 April 2012. Under existing rules, those with accumulated pension benefits in excess of the Lifetime Allowance (LTA) of £1.8 million currently face a potential tax charge of up to 55%.
Changes announced in last year’s budget will see the LTA reduce to £1.5 million from this April, impacting many high earners and those with larger pension arrangements.
As an interim measure individuals can apply for Fixed Protection, securing the higher LTA limit, although the rules mean that all future pension contributions must cease. An individual’s LTA is the cumulative value of all defined contribution and defined benefit pension arrangements and includes any benefits already taken. This reduction from the current £1.8 million to the new £1.5 million LTA could leave a client up to £165,000 worse off without Fixed Protection.
There is no downside to registering for Fixed Protection.
Whilst securing the higher LTA limit will result in no further contributions being allowed, Fixed Protection can be revoked at any time. Therefore, if the LTA increases in the future or the individual’s circumstances change, contributions could continue where it makes sense. Should Fixed Protection be revoked HMRC must be informed within 90 days of the new contribution being made.
Those most affected will include individuals nearing retirement with accumulated pension benefits above £1.5 million or those who believe their benefits are likely to exceed the reduced LTA by the time they take their pension. Registration is by completion of a simple two page form.
Registration before the April deadline also enables the individual to secure a maximum 25% tax free cash lump sum of £450,000 which would reduce to £375,000 from April.
Those who have secured higher pension allowances through primary or enhanced protection should check whether under their current circumstances the tax free cash element is protected as well.
Some individuals will need to decide whether to leave their employer’s scheme prior to April and apply for Fixed Protection, essentially giving up future employer contributions. In some limited cases they can stay in the company scheme as long as pay increases are kept to a minimum.
Employers will also need to ensure that they communicate with their high earners about the implications of auto-enrollment.
It is important that individuals affected by the change in LTA take action now. There still remains enough time to make an informed decision on pension benefits that may have significant financial implications in the years ahead. Contact your financial planning adviser for further advice.
Chartered Financial Planner
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