15th November 2013 at 5:56pm
As you’ll have read in my previous blog – 10 things to consider before the Pensions LTA cut (Part 1), if you’re likely to be of the 360,000 people affected by the cut in the pension lifetime allowance you’ll need to take expert advice before 6th April 2014. To help you I’ve highlighted 10 things you need to be discussing with your adviser, here are the other 5…
6. Do I need to leave my final salary scheme?
In many cases, staying in your employer’s final salary after April will blow fixed protection. This raises the thorny question of potentially opting-out of final salary pension schemes to protect the higher allowance.
- It might be better, if you have more than say 5 years from retirement, to keep building-up your final salary pension – even if this means paying a bit more LTA tax. The amount of benefit accrued each year can be extremely valuable, and your employer will pick up most of the cost. And in the private sector, once you leave, you’re unlikely to get back in.
- But if you are closer to retirement it might be best to opt-out. If you leave the scheme early your benefits will be increased each year in line with inflation. This could give a better result than staying in and taking the tax charge. And the contributions saved can be invested elsewhere.
7. Will my employer offer compensation if I leave the scheme?
Applying for fixed protection means giving up on future pension saving. But what if it also means giving up on ‘free money’ in the form of employer pension funding?
- Will your employer offer alternative remuneration in place of the pension contribution? This is possible in the private sector, but unlikely if you are in the public sector.
- If so, will the alternative be enough to outweigh the potential pension benefit given up after a LTA tax charge? And remember, most employer payments to a pension within your annual allowance will not be taxable, whereas most alternative payments will be taxed as additional pay.
8. How do I keep track on all my pensions?
It will become increasingly important to review the value of your funds against the LTA after 2014.
This will be easier if all your pensions are held in one place. And this can bring other benefits too – economies of scale, wider investment choice and greater flexibility on how benefits can be taken.
Before consolidating all your pensions into a single pension scheme, any costs of transfer must be considered. In particular, watch out for guarantees under older plans that could be lost. But don’t let the tail wag the dog. Weigh-up the value of any guarantee against the benefits of having everything in one place.
9. Review investment strategy
Until now the investment strategy on your pension investments has probably been to provide the best possible return at a level of risk you are comfortable with.
But if you breach your allowance you will only get 45% of the upside on your investment growth because of the 55% tax charge, but will suffer 100% of any downside should investments fall in value.
The balance of risk v reward has been altered. There is now potentially less reward for taking extra risk. And reducing risk may become more critical the nearer you get to both the allowance and your retirement date. In other words, it may become more important to secure any growth to date by reducing future investment risk.
If this is your aim, your investment strategy could be to target a rate of return which will get as close as possible to your allowance without taking unnecessary risk. This should be reviewed on a regular basis to ensure that you do not pay any unnecessary tax charges. At the other end of the scale, any underperformance can be corrected. This might be in addition to making further contributions at the expense of fixed protection.
10. Where should I save after April if I need to stop pension funding?
Stopping pension contribution doesn’t have to mean giving up on saving for retirement. You may still need to discuss with your adviser alternative ways to keep saving for the retirement you aspire to – and to provide a buffer if plans don’t work out.
- You could consider redirecting pension funding to your spouse, to make best use of both your allowances. Two pension incomes can be more tax-efficient than one.
- There are many possible alternative investments to continue your retirement savings. So make full use of other tax privileged investment. For example, official figures (link to http://www.hmrc.gov.uk/statistics/isas/statistics.pdf) show that only 7% of individuals made the maximum contribution to their ISA in 2010/11. And this figure only increase to 29% for those earning between £100,000 and £150,000 each year.
- Holding a variety of different investments can also provide greater flexibility for you and your adviser to achieve a tax efficient retirement income strategy.
For more information on the Pension Lifetime Allowance cut visit our site.
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Tax rules and legislation can change and information is based on our undertsanding of the Law and current HM Revenue and customers practice.