The changes will only affect an estimated 2% of those at retirement with reference to the Lifetime Allowance and 1% of pension savers contributing more than the Annual Allowance, however, for those who are or may be affected there are steps that can be taken to minimise the consequences of the changes.
Firstly ‘fixed protection 2014’ will be available and for those who apply the Lifetime Allowance will remain at the greater of £1.5 million or the Standard Lifetime Allowance (giving upward protection should the LTA increase in the future). Under fixed protection rules no further pension benefits may be accrued, which means no further contributions for those in money purchase arrangements and no increase above a “relevant percentage” for those in final salary schemes. The “relevant percentage” is broadly defined as either the annual rate specified in scheme rules for the revaluation of accrued rights, or CPI (if no rate is specified). Applications for fixed protection 2014 must be received by the HMRC by 5 April 2014; it is expected that the form to apply will be available during summer 2013.
The feasibility of also having personalised protection will be discussed over the coming months. Personalised protection would give a LTA of the greater of an individual’s pension rights as at 5 April 2014 (up to a maximum of £1.5 million) and the Standard Lifetime Allowance (£1.25 million from April 2014). However, unlike fixed protection, an individual with personalised protection will be able to continue to accrue pension benefits without losing the protection. Any pension rights in excess of the LTA at the time benefits are taken would be taxable (currently at 55% if taken as a lump sum or 25% if taken as pension income). Personalised protection would only be available where accrued pension rights were at least £1.25 million on 5 April 2014 and would provide the means for those with large pension pots to secure an LTA at least equivalent to current value with the means to continue funding. If the LTA were to increase in the future it is possible that the additional contributions and any investment growth on the fund value would not attract additional tax at retirement.
Pension benefits accruing against the Annual Allowance charge relate to ‘pension input periods’ which are usually a 12 month period ending in the tax year in question. Therefore a pension input period ending December 2014 will fall in the 2014/15 tax year and will be subject to the reduced Annual Allowance. Strategic planning can capitalise on the potential to maximise pension accrual using pension input periods.
Carry forward remains available and therefore if pension contributions have not been maximised in previous years, any unused Annual Allowance can be brought forward from the previous three years to the current tax year. There are no planned changes to the carry forward rules and therefore the allowances arising in years 2011/12 to 2013/14 and available to carry forward to 2014/15 will be based on the current £50,000 Annual Allowance limit.
It should not be forgotten that pension savings are not the only means of planning for future retirement. ISAs remain an attractive option as savings grow virtually tax free and there is no Income or Capital Gains Tax on gains or withdrawals. The annual ISA limit will increase to £11,520 from April 2013, allowing a couple to save £23,040 per annum. Over a period of 20 years this could equate to a capital sum of £431,391*
With pensions seen as a low priority for many, the repeated changes to rules and added complexity over other forms of savings such as ISAs does little to encourage the long term commitment pensions necessarily require. Those with higher annual contributions, earnings or accumulated fund value face reductions in allowances which could see a significant percentage of their savings, or planned savings, suffering tax of up to 55%. Even those in a seemingly safe final salary scheme could fall foul of the reduced annual allowance if they receive a significant pay rise in any year, for example, on promotion.
Clear objective based planning is essential to negotiate the many options for retirement, whether accruing benefits or at the time benefits are taken. A detailed strategy and review of all available allowances, including carry forward and the effective use of pension input periods, as well as the application of fixed protection where appropriate are all tools that can make a marked difference in eventual retirement income.
At Fiducia our advice team are experienced in providing practical, straightforward yet effective financial planning strategies to optimise retirement income. Please do contact us if you would like to discuss how we can help.
* Figures calculated by Fiducia Wealth Management Limited and assume a net of all charges return of 5% per annum with all growth and income reinvested.
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This article is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at December 2012 and the contents of the 2012 Autumn Statement. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.