Time to seek advice on Pension before before April 16
Dealing with a cut to the Lifetime Allowance (LTA) may seem to be the norm nowadays, every year the level of pension that you can accrue before a tax charge is getting smaller and smaller, indeed the reduction in the lifetime allowance has been on the slide.
With each subsequent cut brings a nasty sting in the tail as the impact filters down into the mainstream of society – affecting a greater number of people.
There are a lot of people sleepwalking in to a massive tax charge and they are totally oblivious to the position they find themselves in.
I don’t need to bother with that now –Do I?
If you have accrued a pension of £50,000 in a defined pension (DB) scheme the calculation today would value these benefits at £1m, However even if your pension value is currently lower than this and you are a 10 years away from retirement you may still have a potential “big tax bill “sitting on the horizon
A fund of £780,000 today will breach the LTA in 10 years’ time if it achieves a real rate of return of 2.5%. And that’s without making any further contributions. Even allowing for the fact that from April 2018 the LTA will increase in line with CPI,
Action Point: Already above £1M, with no existing protection. These clients need to register for the new protections. But which one?
1.At risk of exceeding LTA at retirement, even if pension saving stops now. These clients need to review their pension before April. Protection must be seriously considered.
2.At risk of exceeding LTA at retirement if pension savings continue. These clients need to review their pension regularly, even if they don’t opt for protection now.
Aside from the fundamental ‘protect or not’ question, the need to review pension saving now raises a host of other advice issues which may need urgent attention before April 2016:
- Should you pay a final pension top-up before opting for Fixed Protection?
- Should you increase contributions to maximise the level of protection available?
- Will consolidating legacy pensions make it easier to monitor fund values against the LTA?
- Could clients without protection secure a higher tax free cash entitlement by taking their cash before April?
There’s much to consider and action may be needed before the tax year end.You need to identify if you are at risk, and seek advice.
This creates its own challenge. You’ll need up to date values, and ideally projections, for all their pensions. This should be relatively straightforward for active Defined Contribution pensions. But it can be more difficult for legacy plans and defined benefits.
If regular monitoring against the LTA is necessary, it could pay to consolidate pension savings to make the task much easier.
Locking into a higher Lifetime Allowance
With pension funding in excess of the reduced limit from April 16 if they don’t put protection in place a tax charge is waiting.
With the Lifetime Allowance being reduced from £1.25m to £1m from April 2016 , a client could see a tax charge of up to £137,000. It could also reduce the maximum tax free cash amount that can be taken from £312,500 to £250,000. Clients entitled to TFC greater than this amount who don’t wish to apply for protection may want to crystallise benefits before April.
Two new forms of protection will be available for those caught.
What can I do NOW ?
Fixed protection 2016 allows clients to keep a £1.25M LTA beyond 2016. But, as before, there’s a trade-off:
Defined Contributions have to stop after 5 April 2016. Increases in Defined Benefits rights can’t exceed the ‘relevant percentage’ (normally CPI for the previous September) in any tax year from 2016/17 onwards.So this only leaves a short window to maximise their tax efficient contributions and build a bigger retirement pot to protect. Don’t forget that carry forward of unused annual allowance could be used as a final funding boost. And with the amendments to the annual allowance and alignment of pension input periods in 2015/16, there could scope for additional funding this year.
Individual protection 2016 is only available to clients with pension savings worth more than £1M on 5 April 2016. This gives clients a personal LTA equal to their benefit value on 5 April 2016 (up to a maximum of £1.25M). Importantly, Individual Protection 2016 allows funding to continue. There’s no downside to individual protection, so anyone eligible should do it. They’ll secure an increased LTA with no trade-off. It can be used alongside any of the fixed protections to provide a safety net to fall back on if fixed protection is lost.
Anyone close to the LTA may want to consider some additional funding before the end of the tax year to push the fund value over the £1M limit to secure individual protection.
However, the deadlines for registering for protection will change. Individuals will no longer need to apply for fixed or individual protection before next April. New deadlines are currently under consideration and due to be announced later in the year.
Protection won’t be right for everyone – especially if it means missing out on valuable employer pension funding. Some will be in a better position by continuing to fund and paying the tax charge. We’ll look at this and advise accordingly
But now is the time to put the wheels in motion and identify if this change will affect you. Discussions can then begin over the best outcomes based on individual circumstances, leaving plenty of time to put plans in place before April 2016.
Advanced Asset Consultant have been providing advice to clients for many years in this area, helping to secure benefits in the most tax efficient way as well as advising client of all the major changes that have been introduced over the past 12 months.
Advice is the key to protecting your wealth-contact us at firstname.lastname@example.org or phone on 01413312434