Pensions issue may be complicated but protecting your pot can be simple task
Published 22/12/2008 | 11:26
It's not often that I rant about deadlines. But, as I see it, this one is not only important but needs some explanation too.
So, cast your mind back to April 2006 when we were promised that, from that date, all pensions would be simplified.
As it happens, not much was simplified. 1,400 pages of new legislation were in fact written and there was very little of the old stuff scrapped.
But, one radical change was made and this was to the amount of pension that any single person could save, which was capped.
This was called the lifetime allowance and it said, essentially, that anyone who at the time of taking benefits from their pension had more than the limit (£1.65m in 08/09) would lose up to half of the excess over the limit.
While I realise that there are probably not too many people with pension funds of this size, there are those who, despite everything written about this, may well get caught in the future and who need to be aware of this now so that they can avoid any future penalties.
Do bear in mind that the lifetime limit applies just as much to those with government pensions such as doctors, senior civil servants etc as to company directors and the self employed.
There are two types of protection available – primary and enhanced.
Enhanced protection fully protects an individual from the lifetime allowance charge of 55%.
This is fine as far as it goes but there is a quid pro quo for those who take up the Enhanced Protection as they will have to stop “all relevant benefit accrual”.
Translated into plain English this simply means that you cannot put anything more into the scheme. This also applies to final salary schemes.
Primary protection is only available to those who had more than £1.5m in their scheme at April 2006.
However, they would still face a tax charge on any benefits above their lifetime allowance. To help you differentiate between the two, a couple of illustrations follow:
Sally, 40 years old, has a pension fund of £1m at April 5, 2006. She pays no further contributions after that date.
Roll forward to her situation at age 65 and we find that her fund has grown to £4m. At the same time the lifetime allowance has increased to, let’s say, £3m.
If she does nothing she will pay a tax charge of 55% of the excess — £550,000. But if she had enhanced protection she would avoid the tax altogether.
James is in a final salary scheme and his benefits at April 6, 2006 were £1.8m. He continues to enjoy his employer’s contributions etc and then retires in August 2010.
At that time his benefits are worth £2.2m and the lifetime allowance is £1.8m. He would normally face a charge of £220,000 but, if he opts for Primary Protection, then he could see this charge reduced to £22,000.
So there you have it and, although it may still be as clear as mud, the real point here is to alert you to the deadline for registering any protection, which is April 5 next.
Although this may feel a long way off, I would suggest that sooner rather than later is the time to take some specialist advice on the subject.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk