The countdown clock is ticking– will you be ready?

It is estimated that potentially over 360,000[1] people could be affected by the new pensions lifetime allowance (LTA) changes, according to HM Revenue & Customs (20 March 2013). If you are one of these people, you will need to act fast, and we recommend that you contact us immediately or you could miss out on the opportunity to protect yourself from an unnecessary tax charge.

 

The LTA will reduce from £1.5m to £1.25m on 6 April 2014, so you now have a matter of weeks to make a decision. It applies to an individual’s total pension worth. If applicable to you, there is a real need to act quickly and gather details of current values and growth projections for any private pensions, including self-invested personal pensions, as well as any workplace money purchase or defined benefit schemes.

Calculations by Standard Life show that due to investment growth, an individual ten years from retirement with accumulative pension savings of around £700,000[2] or a final salary pension income of around £60,000 could be at risk of breaching the £1.25m LTA.

Pension savers who don’t check to see if they will be affected and who exceed the new LTA will expose up to £250,000 of their pension savings to a 55% tax charge – leading to an unexpected tax bill of up to £137,500 (this is based on the difference between the current and new LTAs) which could potentially be avoided if professional advice is taken now.

Salary earners most likely to be impacted by the change Research by YouGov, on behalf of Standard Life, shows less than a fifth (19%) of people know what the LTA is, and only 31% of people earning more than £50,000 – the salary earners most likely to be impacted by the change – are aware of it.

Research for the Department of Work and Pensions shows that an individual will work for an average 11 employers[3] during their lifetime, which means some people are likely to have accumulated many different pensions over the course of their careers, making it more difficult to get a clear view of their overall pension fund value.

Source:

[1] www.hmrc.gov.uk/budget2013/tiin-1046.pdf

[2] Someone ten years from retirement with multiple pension pots worth around £700,000 could exceed their allowance if their pot grows at 7% a year, which includes a 1% charge – even if they stop paying into it now.

[3] www.gov.uk/government/uploads/system/uploads/ attachment_data/file/220405/small-pension-pots-consultation.pdf The information in this article is based on our understanding in February 2014. Your personal circumstances also have an impact on tax treatment.

Tax treatment is based on individual circumstances and may be subject to change in the future.