Can your pension savings be too large? Your pension lifetime allowance

There are a number of tax advantages available to saving into a pension. For a revision of these see Pensions: a 20% off sale.

You can save as much as you like into your pension plan but there is a limit on the amount of tax relief you can receive on your contributions. To limit the amount of tax advantages the government has set a lifetime allowance which refers to the maximum amount of pension savings you can build up without further punitive tax penalties.

If your pension fund is in excess of the lifetime allowance there will be a tax charge on the excess.

This limit is currently set at £1.5 Million but will reduce to £1.25 Million from 6^th April 2014. The limit covers all pension plans including plans where you do not contribute yourself- e.g. if you are in a non contributory pension from your employer.

If your pension is a final salary scheme the limit of £1.5 Million is roughly equivalent to:

• £62,500 if you don’t take a lump sum
• £46,875 if you take the maximum tax free lump sum

For a defined contribution pension the lifetime allowance will be the value of all your pension plans.

The lifetime allowance charge

If your pension plan exceeds the lifetime allowance there is tax charge payable on the excess. The rate of charge depends on whether you take the excess as a lump sum or as income. Rates are:

• 55% if taken as a lump sum
• 25% if taken as pension income

What can you do to protect against this

Two options are available to protect against the charge:

• Fixed protections
• Individual protection

Under fixed protection the lifetime allowance can be fixed at £1.5 Million from 6^th April 2014. To be eligible for fixed protection you must apply before that date. If you apply for fixed protection you cannot make any further contributions into your defined contribution plan or build up any further benefits from a defined benefit plan.

The alternative is individual protection. Details of this protection are still to be confirmed but under individual protection you can continue to make contributions. You will be able to apply for this from 6^th April 2014.

What next?

Consider whether your pension plan is likely to exceed £1.25 Million when you retire. Dependant on your age the value of the plan could be significantly smaller than this now. For example, a pension plan valued at £369K today which grows at 5% per annum will have increased to £1.25M in 25 years time without any additional contributions.

If your plan is likely to exceed this amount take advice now. If fixed protection is the best option for you there is currently only 9 months to get the protection in place or it is lost.

If you would like to chat with me to discuss this please call me on 01932 698150.

photo credit: Flickr/Tax_Credits