Pension pots need protecting again

Pension pots need protecting again

Savers may need to protect pension funds yet again as the government continues to chisel away at the lifetime allowance.

Plans to reduce the allowance from £1.25m to £1m were first announced in George Osborne’s 2015 Budget and come into force on 6 April this year. Since being introduced as part of the A-Day reforms, this is the third time the lifetime allowance has been slashed.

Initially set at £1.5m with gradual increases to £1.8m in 2010, it was then reduced back to £1.5m and £1.25m in 2012 and 2014 respectively.

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Rowena Griffiths, chartered financial planner at FFM London, said, “Everyone knows the government is trying to reduce the deficit, and tax on pension contributions is an easy thing to reduce, which is fair enough, but the lifetime allowance charge is a tax on someone growing the money efficiently, so that just seems absolutely crazy.’’

The consequence for not protecting funds could be severe, as any excess will trigger a 55 per cent charge for lump sum withdrawals, or 25 per cent if taken as income.

In order to shield excess funds from the tax levy, savers would need to apply for individual or fixed protection. While there is no application deadline, HM Revenue and Customs recommends to submit before crystallising benefits.

Individual protection 2014 is still available for savings amassed any time before this point, up to a maximum of £1.5m.

The tapered annual allowance will deliver a further blow to those in the 45 per cent tax bracket. The current £40,000 annual allowance will reduce by £1 for every £2 of income above £150,000, subject to a maximum taper of £30,000. Therefore, once income reaches £210,000, an individual can only receive relief on contributions at or below £10,000.

However, Ms Griffiths was positive about the impact for advisers, ‘’If people choose to stop saving in a pension to avoid a tax charge then they need to be doing something else with it. So that’s where financial advice can come in,’’ she added.