How to shelter more of your pension from the taxman
Higher earners with large pensions should start assessing whether they need to apply for a special provision to protect their pots from a 55 per cent tax charge.
People can accumulate up to £1.8 million in their pension during their lifetime (known as the ‘lifetime allowance’), but from the next tax year this allowance will fall to £1.5 million. Any pension savings in excess of this amount will be taxed at 55 per cent.
Public sector workers with large final salary pensions may find themselves nearing the limit. And younger people should assess whether a pension worth a few hundred thousand pounds now could in fact grow to more than £1.5 million by the time they reach retirement.
Mike Morrison, head of pensions at Axa Wealth, comments: ‘It can seem like only people with large pension funds should be worried. But the function of time and investment return means there could be quite a few pension pots that exceed £1.5 million.’
HM Revenue & Customs has a special provision called ‘fixed protection’, which means people can continue to protect their pensions up to £1.8 million. This can be obtained by filling in a simple form (http://www.hmrc.gov.uk/pensionschemes/apss227.pdf) and sending it to HMRC before 5 April next year.
However, Morrison points out that once an individual has fixed protection, they will not be able to pay any more money into their pension. ‘If your pension does not look like it will exceed £1.5 million after all, you can just start paying into your pension again [and the fixed protection will be invalidated].’
Individuals that do apply for fixed protection need to be aware of auto-enrolment rules for company pension scheme that come into effect next year.
‘If you’ve stopped contributing into your pension scheme and applied for fixed protection, and then your employer starts to automatically staff into its pension scheme, you’ll need to opt out again,’ says Morrison.