Pensions - the need for action (again..)

As you may be aware, there are some significant changes to the taxation of pension funds and pension contributions which are going to take place on 6 April 2014. It is therefore very important to review your pension arrangements now to ensure that no tax saving opportunities are missed. 

Reduction in the Lifetime allowance (LTA) - The LTA is reducing from £1.5 million to £1.25 million from 6 April 2014. The LTA is the maximum amount of pension savings that you can build up over your lifetime that benefit from UK tax relief. On crystallising your pension benefits, any amount received which is in excess of the LTA is subject to the LTA charge (25% for annuities/pensions and 55% for lump sums). Individuals who do not hold any other form of protection may apply for Fixed Protection 2014 (FP14) which will result in the higher LTA of £1.5 million being retained. However, the downside is that you will not be able to accrue any further benefits or make any further contributions. Such protection would need to be applied for before 6 April 2014.

There is a further protection available – Individual Protection 2014 (IP14) – which seeks to give the applicant their own personalised LTA based on the value of their pension funds on 6 April 2014 (subject to a cap of £1.5 million). Unlike FP14, this would enable further contributions to be made or benefits accrued but there would be a LTA charge on the excess over this amount. The regulations for IP14 will not be available until Summer 2014 and therefore applications cannot be made until this time. It will be possible to apply for both IP14 and FP14 and there will be situations when it makes sense to apply for both.

If you do not hold any form of pension protection, thought needs to given as soon as possible whether it is appropriate to apply for protection. You need to factor in the potential growth in your pension savings, so may wish to take action even though your savings may be worth well below £1.25m today.

Reduction in annual contributions – The maximum amount which you can contribute into a pension fund and receive tax relief is reducing from £50,000 to £40,000. It is therefore important to consider whether you wish to maximise the amount of contribution you are able to make before 6 April 2014. The amount that you can contribute depends on a number of factors including the ability to change the Pension Input Period, any unused relief carried forward from the previous three years and the amount of contributions already made by you and your employer.  The calculations are often more difficult than thought and opportunities do arise by taking specific steps, such as changing a Pension Input Period.

The taxation of pensions is a complex area and one where it is important to take advice on both the tax and the investment implications. If you would like to talk further about your options, please do get in contact with us.