Cut your tax bill by £165,000 in retirement

Friday, October 21, 2011 | Posted by: Mike Hyland
Categories: Personal, Protecting your wealth | Tags: tax, tax planning, HNWIs, income tax, pensions, retirement, Mike Hyland, minimise, high earners, higher rate taxpayer, pension, James Temperley, pension series, pensions changes, lifetime tax relief, lifetime allowance, fixed protection, 50% tax

Our pension series continues with a look at the changes to the pension rules, which may cost you up to £165,000 if you don’t take action before 6 April 2012.

Our previous two posts have dealt with why you should consider contributing to pensions and how they can be used as a family wealth and inheritance planning tool. But what about those of you who have known this all along and have built up a vast pension pot? There are legislative changes afoot which may cost the unwary…

How big is your pot?
Each individual can accumulate a pension pot up to a certain limit, known as the lifetime allowance within their total pension arrangements without incurring punitive tax charges when taking benefits from these funds.

This allowance is currently £1.8 million, but the Government has announced that it will fall to £1.5 million from 6 April 2012.

For those of you with final salary pension schemes, your pension pot is measured as 20 times the annual pension you are entitled to, plus any lump sum, so you may breach the reduced allowance if you are likely to receive an annual pension of £75,000, or less if you will also receive a lump sum. This is before taking into account the fund value of any personal arrangements, which will also be added when calculating your total benefits against the lifetime allowance.

How to protect your pension
So what can you do if your pension is worth more than £1.5 million, or you expect that it will become worth more than £1.5 million before you begin to take benefits from the fund?

With the exception of those who have already protected their pension pots using enhanced or primary protection, there is one simple thing that all individuals with significant pension pots should be considering. This is to apply for something called fixed protection and HM Revenue and Customs (HMRC) must receive your application by 5 April 2012.

The effect of an application for fixed protection is to fix your lifetime allowance at the current level of £1.8 million, rather than the reduced level of £1.5 million which will otherwise apply from 6 April 2012. Restrictions apply, for example you cannot normally make further contributions to your pension after 6 April 2012, and final salary scheme members cannot accrue significant further benefits under their scheme.

It is also possible to apply if your total pension benefits are currently under £1.5 million but you believe that, with growth over the next few years, they could be affected by the new £1.5 million limit.

Given that pension benefits in excess of the lifetime allowance, which are taken as a lump sum are taxed at 55%, applying for fixed protection could save you up to £165,000.

If you think that it may be appropriate for you to make an application, or you have any other queries in relation to your pension position, we would urge you to take professional advice as soon as possible in order that your position can be reviewed and a claim made in good time if appropriate. 

For further information visit our Private Clients Pensions page or contact your local pensions specialist.

Pension planning series written by Mike Hyland, Assistant Tax Manager, and James Temperley, Chartered Financial Planner.

You might also find these posts useful:

* Read more posts in our pension planning series
* ‘How does HMRC know I have undisclosed income?’
* Fancy a capital gains tax rate of less than 10%? Here’s how…