Beware the panacea of pension allowance protection

Jeff Prestridge

Jeff Prestridge

Life is never easy, especially in the crazy world that is pensions, a world constantly infiltrated by politicians with agendas to pursue and spending to curb.

The latest infiltration happens soon – 6 April to be precise, when the lifetime allowance is cut (yet again) to £1.25m and the maximum amount that can be contributed to a pension in any one tax year is reduced by £10,000 to £40,000.

And to think that pre-financial crisis and before the resulting assault on savers, the lifetime allowance stood at £1.8m. What have savers done wrong to deserve this other than be prudent?

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Based on the number of press releases and factsheets that have hit my desk in recent weeks, the lifetime allowance reduction is an issue that is exciting many pension providers and pension advisers. This adrenalin rush is driven by the fact that there are things that can be done before the end of the tax year (and, for that matter, after 5 April) to escape the trap of the lower allowance.

One of these sources of information hitting my desk comes from independent financial adviser Almary Green, which has a two-page leaflet (quite nicely put together) telling me that there are “new protection opportunities” available. It then goes on to describe these two opportunities: “fixed protection” for those who apply for it from HMRC before the end of the tax year and “individual protection”, available at some unknown date in the next tax year.

All very helpful, particularly the section on fixed protection where Almary Green explains how the “opportunity” works – how your lifetime allowance can be preserved at £1.5m provided you make no further contributions to your pension funds post 6 April. In effect, you must opt out of active membership to qualify for the fixed protection.

AJ Bell, a company I admire hugely, kindly prepared me a key questions-and-answers note on the changes to lifetime allowances with the company’s Charles Galbraith, adding that their impact would be “very important for many pension holders, some of whom may not realise that this reduction will affect them”. Like Almary Green, he said that savers might be able to protect their pension from “potential tax charges”.

There is more. Independent wealth manager and financial planner Saunderson House issued a press release headlined: “Do not get caught out by the changes to the pension lifetime allowance – even if you’re some way off the limit, you should still consider taking action.”

As for pension provider Liberty, it did not mince its words, stating that Britons were “sleepwalking” into a tax trap and that ignorance and inertia ruled. The lower lifetime allowance, it screamed, “will no longer be just a tax on the rich”.

In light of all this material, and the fact that people in defined benefit pension schemes can easily be caught out unawares by the lifetime allowance reduction (you only need an annual pension of £46,875 to hit the £1.25m allowance), I thought it was a subject ripe for coverage.