13th November 2013 at 4:29pm
Did you know the pension lifetime allowance (LTA) limit is falling again in April 2014? This video helps explain the change:
If Chicken Little had claimed the pension lifetime allowance was falling I doubt it would have created the same mass hysteria. Cutting the LTA from £1.5M to £1.25M may not see too many struck with a sense of impending doom. And why would it! A £1.25M pension fund is just a dream for most of us.
But, with a frozen allowance a distinct possibility, you don’t have to be close to the limit right now to be faced with a 55% tax charge at retirement.
Just like little acorns grow into great oaks, investment growth can quickly swell the size of your pension pot. If you’re within sight of retirement you may need to start giving some thought to protecting your pension benefits before next April’s cut. The price for putting it off could be £137,500 in tax. Not exactly chicken feed!
Are you likely to be affected?
This table shows the value of the current pension pot that could grow to £1.25M at retirement. It is split to show selected terms to retirement and using a spread of different growth rates (and assume no further contributions are made):
If you’re 10 years from retirement with a current pension pot of £700,000 you could exceed your allowance if your pot grows at 7% a year – even if you don’t pay another penny into it. Yet it’s unlikely you were even aware you had a problem. Of course, growth could be higher or lower than shown in the table – depending on your investment performance and we don’t know what the allowance is likely to be in 10 years’ time.
It’s even trickier with some company pension schemes which are linked to your final salary. It’s easy to underestimate just how valuable a final salary pension is – or how it’s tested against the LTA. You could be surprised to learn, for example, that a £25,000 paid-up pension from a previous job already eats up £500,000 of your allowance. Adding in revaluation for leaving up to retirement, at say 3.3% over 10 years, takes the pension up to £34,590 – using up almost £692,000 LTA.
Take our test to find out how you could be affected.
The government has tried to soften the blow if you’ve already exceeded the new allowance or expect your pension fund to break it when you reach retirement. Pension benefits can be protected from a possible 55% tax charge if the fund breaks the reduced limit. But it means that some difficult choices have to be made before next April.
I guess if you have read this far you probably think you may have some cause for concern. There’s a lot to consider, and if you are concerned, you will need to seek expert advice quickly.
For more information on the LTA changes visit our site.
As with any investment the value of your fund can go up or down and may be worth less than you invested.