SIP Wealth Management, the Swansea-based Chartered Financial Advisers that is part of the WPS Financial Group, has warned diligent pension savers to take action now to avoid being caught by changes to the lifetime allowance on pensions that could leave them with a hefty tax bill.
From April 2014, the UK government is reducing the maximum amount an individual can have in their pension before it becomes subject to punitive taxation to this level. The cap is known as the ‘lifetime allowance’ and it is being reduced to £1.25 million from £1.5 million.
The sum applies to an individual’s entire pension savings (apart from the state pension).
Although the new cap might seem like a lot, HM Revenue & Customs estimates that the 2014 reduction to £1.25 million will mean 360,000 pension savers are impacted.
Paul Williamson, Financial Planner and Director at SIP Wealth Management, warns that both hard workers who have simply contributed heavily to their pension over the years and those in generous final-salary company pension schemes or where the employer contributes healthy amounts as well, could easily be unwittingly caught by the new rules.
“Although the sum of £1.25 million will seem like a lot to many people, there will be thousands of people who will be affected by these changes. For those on final-salary schemes, if their annual pension (after the maximum lump sum has been taken) is higher than around £55,000, they could be affected. Savers with defined-contribution-type schemes need to look at the total value of all pension assets.”
The tax implications can be severe – up to 50% where individuals drawn down money as lump sums. Fortunately, there are ways to avoid paying the lifetime allowance charges. The most common is to apply for what is known as ‘fixed protection’, which caps your lifetime allowance at £1.5 million.
“But you need to move fast,” Williamson said. “The deadline for this scheme is April 6, 2014. This is about to become a big issue in pensions. High earners and those benefitting from generous company pension schemes should check out their status as soon as possible and, ideally, seek professional advice.”
The reason for the cap is because saving into a pension attracts tax relief. It was argued that very wealthy people were obtaining too much tax relief by building enormous pensions. The cap started at £1.8 million and has been reduced in stages. A further reduction to £1 million has also been mooted.
SIP Wealth Management is a specialist Practice of Independent Financial Advisers with over 50 years’ experience and expertise in developing ‘Self Invested’ Pension and Investment Portfolios.