Adam

Successive governments have meddled with the tax reliefs for pension savings.  In 2006 fundamental changes were made to limit the amount of tax relief that could be given to a person in their lifetime.  This Lifetime Allowance (or LTA) was initially set at £1.5m.  It now stands at £1.8m but will reduce on 6th April 2012 to £1.5m again.

Adam, like many of our clients, needs to keep an eye on the LTA.  If his pension savings exceed it, he may suffer an unpleasant tax rate of 55% when he draws his pension savings.  His position though is complicated by having amassed different types of pension savings over his career.

Several years ago Adam was in a Defined Benefit (DB) scheme with a large financial services company.  When Adam was promoted the company offered him a top-up arrangement to his DB pension; promising to give him an extra payments when he retired.

Adam then for many years paid in to Defined Contribution (DC) plans and managed to create a pot of DC pension savings of about £1m during that time.

As Adam reached the time when he would like to retire he needed our support to consider:

  • How much could he reasonably put away in pension savings and get higher rate tax relief in the last couple of years of his career;
  • What impact would the fall in the LTA from £1.8m to £1.5m have on Adam’s pension savings; and
  • How were his old DB and top-up benefits valued and added to DC savings for the purposes of the LTA;

In our work with Adam we also had to advise him on the implications of his former employer deciding to fund his old top-up promise.

Our advice to Adam revolved around:

  • Using new rules for carrying forward pension relief over three years to pay a large one-off pension contribution;
  • Persuading Adam’s former employer to fund his old promise after the end of his current Pension Input Period so as to avoid a tax charge on Adam; then
  • Taking a once-off opportunity for Adam to fix his LTA at £1.8m before 6th April 2012

We were able to achieve a very good tax outcome, whilst also allowing Adam to accept his former employers desire to fund his old top-up pension, in turn giving him more financial security.