From April 2016, the lifetime allowance will fall from £1.25 million to £1 million. The lifetime allowance is the maximum that can be built up in a pension over a working life and receive tax relief. Any savings in excess of the lifetime allowance will be subject to a tax charge of up to 55 per cent when you start to take your money. The actual charge will depend on whether it is taken as a lump sum or as income. The charge does not just relate to monies you have paid into your pension – if you invest successfully and the value of your fund rises to £1 million or more over time, you will still be penalised. For example, suppose you have a pension fund of £600,000 and do not expect to access your pension for another 15 years. If we assume that the pension grows by 5 per cent per annum, your pension could be worth £1,247,356 at retirement. This would be without any further contribution(s).
With this in mind, we expect more people to be captured by this legislative change than the Government has suggested. If you currently have £600,000 or more in your pension, you need to consider taking action to protect yourself from the reduction in the lifetime allowance.
If you are within a few years of retirement, and with a pension fund approaching the £1 million limit you could opt to use protection. The protection would allow for the current lifetime allowance of £1.25 million to be used. To secure this protection you would need to choose not to make any contributions into your pension with effect from the new tax year 6th April 2016.
If any pension contribution is made from the 6th April 2016, this protection is no longer available.
If you are concerned about the change and how it might affect you, please do not hesitate to contact Greaves West & Ayre for advice.
Joe O’Brien DipPFS