Susie Laws, Director & Chartered Financial Planner
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“Following the budget, should I pay into a pension again? And what about if I have existing transitional LTA protection”

These are questions that I have been asked a few times since Wednesday!

In short, there is no simple answer and it will depend on a number of different things, such as; your circumstances; what your longer term goals are with regards to your pension funds; affordability and so on.

For client’s who are running their own business, funding a pension can be a useful mechanism to move profits from the company into their ownership.  It is a corporation tax deductible business expense and with this set to rise to 25% from 6th April for many businesses, this looks even more attractive.

Under the proposed changes and assuming no pension protection is in place, although the LTA tax charges are being scrapped, individuals are still limited to a maximum of £268,275, which is 25% of the current LTA (£1,073,100) in terms of how much tax-free cash (TFC) they can draw.

Therefore when funding pensions for those who have funds above the current LTA, individuals will have to bear in mind that their entitlement to tax free cash will be limited to 25% of £1,073,100.  Any contributions where existing funds exceed this threshold will be taxed at their marginal rate when later withdrawn from the pension.

So for a business owner adding £30,000 to a pension fund of £1.2m post 6th April, this will:

  • save corporation tax at up to 25% on the contribution
  • move funds from the business to their own name
  • increase the value of their pension which is not normally part of their estate for Inheritance Tax Purposes.
  • when accessed, this element of the pension fund would be added to other taxable income and taxed at their own marginal rate of income tax (0%, 20%, 40% or 45%).
  • not benefit from any further tax-free lump sum when they take benefits

Tax efficiency will therefore depend on what level of income tax the individual expects to pay when they access the pension in future and what their current income tax rate is if they extracted the same amount from the business as either salary or dividends.

Further considerations….

What about if you have Fixed Protection 2012 (FP12), FP14 or FP16 or another type of transitional LTA protection? FP12, FP14 and FP16 would provide you with higher TFC entitlement of £450,000, £375,000 or £312,500 respectively.

Level of protectionMax PCLSApplication deadline
Fixed protection 2012£1.8mn£450,0005th April 2012
Fixed protection 2014£1.5mn£375,0005th April 2014
Fixed protection 20161.25mn£312,500NONE

source – HMRC/AJ BELL

 

Fixed protection is normally lost if the member either builds up benefits in their defined benefit scheme or contributes to a defined contribution scheme.

HMRC (March 17), confirmed that as long as an individual registered for protection before 15 March 2023, they will be allowed to ‘break’ these protection rules and keep their higher tax-free cash protection.

With this in mind, there could be significant advantages for individuals to continue to fund pensions, even if their funds are in excess of the current LTA.

Whilst the IHT benefits of pensions remain (especially for those who pass away pre-75), building this fund up as much as possible could be the best option.  For anyone with a shortened life expectancy where survival beyond 75 is uncertain, leaving pension funds on death to family members may be preferable to leaving other assets due to the tax advantaged status of pensions. In this scenario, not accessing the TFC and leaving it to be passed tax free to beneficiaries (assuming death pre age 75) could be beneficial.

For the majority of people however, it is more likely that death would occur post 75. In this scenario taking the max TFC post 75 and either gifting this (assuming a life expectancy of greater than 7 years) or investing it into other IHT qualifying investments would make sense.

But what happens if the rules all changes again if we see a change in government? This is something that we as planners are very mindful of currently.  Labour have already come out and stated that they would revoke the changes proposed if they come to power at the next election. This does not mean that it is certain to change however and as I regularly remind clients, we can only plan around the rules that are in place at any given time.

That’s not to say however that individuals shouldn’t be minded that this may be a relatively small window of change.

As is often the case with budgetary changes, they will have different impacts on peoples planning and so seeking advice to discuss your own circumstances, goals and financial aspirations is always the best way forward.

***UPDATE***

Finance (No. 2) Bill

The Public Bill Committee has now completed its work and has reported the Bill with amendments to the House, and is no longer able to receive written evidence.

What happens next?

The Bill is now due to have its report stage and third reading on Tuesday 20 June. Amendments can be made to the Bill at Report Stage. Amendments to be considered are selected by the Speaker.