Pension savers are rushing to protect their lifetime allowance, following its reduction in April this year.
The lifetime allowance is the maximum amount you can save in a pension over your lifetime. Any amount saved in excess of this is taxed at a rate of 55% (or 25% if taken as income). It currently stands at £1 million following a reduction from £1.25 million in April.
This followed a reduction to the lifetime allowance in April 2014, when it fell from £1.5 million to £1.25 million.
However the government allows savers that have been caught out by reductions to the allowance to apply for protection that enables them to carry on benefiting from higher allowances.
Since the launch of a new online portal in July, that allows savers to apply for protection online, HMRC has confirmed that it has received 17,453 applications, 617 of which apply to the 2014 reduction.
Commenting on the numbers, Nathan Long, senior pensions analyst at Hargreaves Lansdown says: “Pension investors have flocked to register for the latest round of protections as the drop in the Lifetime Allowance begins to bite. A £1 million lifetime limit is no longer a problem just for the highest earners and could impact those who have invested their pension wisely.”
He adds: “It can be a real dilemma to understand if you may be impacted as the rules are complex, however all is not lost for those who think they may bump up against the limit. Providing no further contributions have been made since 5 April this year they can still apply for protection against the latest drop with some even able to claim alternative protection while continuing to make contributions.”
I think I’m caught out by the allowance. What can I do?
Fixed protection lets savers retain a lifetime allowance of £1.25 million, however no further contributions are permitted and you will not be eligible if you have made any payments into your pension since April 2016.
Individual protection meanwhile allows savers with pensions worth in excess of £1 million on 5 April 2016 to set their lifetime allowance at their pension’s value on that date, although they can carry on making contributions should they so wish.
Savers whose pensions were valued in excess of £1.25m in April 2014, may also be able to apply for individual protection for the previous reduction from £1.5 million. Their lifetime allowance is equivalent to the value of their pension on the last day of that tax year.
Mr Long has the following tips for people who think they may be caught out by the lifetime allowance:
- Get valuations for all your pensions, including defined benefit schemes. Uncovering pensions from former employers is a must.
- Work out when you will retire and project forward your pensions to get an idea of what they will be worth at that point. This should flag up whether or not you will be in danger of breaching the allowance.
- If you haven’t paid into your pension since April 2016 you can apply for fixed protection to preserve an allowance of £1.25 million. If you have made contributions since this date, and your pension was valued in excess of £1 million, you can apply for individual protection that allows you to set your allowance at that level.
- Don’t forget the value of employer pension contributions. It may still be worth maintaining pension contributions even if you are taxed for breaching the allowance. Alternatively your employer may be willing to pay you more salary in lieu of pension.
- Seek professional advice as this is a very complex area of financial planning.