Protect your pension from 55% tax


 Higher earners and investors with large pension funds are being urged to take action to preserve the value of their retirement income ahead of big cuts to the ‘lifetime allowance’ (LTA) for pension plans.

From 6th April 2012 the maximum amount that can be drawn from a registered pension without triggering a tax charge will fall by £300,000 from £1.8m to £1.5m.  This means that anyone holding a pension fund valued above this threshold after April could be subject to tax at a rate of 55%.

However, under a measure to ease the transition for those at the cusp of the new limit, the government is allowing individuals to lock in to the higher £1.8m allowance by applying for ‘fixed protection’.

Sarah Lord, managing director of Killik Chartered Financial Planners said: “If your fund is close to the new lower lifetime allowance of £1.5m, you may wish to protect your benefits up to the current limit of £1.8m, but you should be taking action to do this now.  We are seeing a lot of enquiries from clients who are at, or near the lower threshold and who want to know what is the best course of action.”

However, she also said that individuals should bear in mind that once they have gained fixed protection, they must stop all pension contributions.  “Because of this condition, making a decision will be complex for some – and advice will be needed”, she said.

Advisors also warn that some investors could lose access to tens of thousands of pounds in tax-free cash after April 6th if they fail to act.

At present, individuals aged 55 or over can take ¼ of their pension savings up to the current LTA of £1.8m in tax-free cash, ie a maximum of £450,000.  But from April 6th; pension investors will only be able to draw 25% of £1.5m or £375,000 unless they have applied for fixed protection.

“This represents a potential fall of £75,000 in the amount individuals can draw as tax-free cash and equates to £150,000 of gross income for 50% taxpayers, or £125,000 for 40% taxpayers.”  Mike Fosberry, financial services director at accountancy and investment management group Smith & Williamson said.

“It is essential that pension investors aged 55 or over with larger pension pots take urgent action to review their tax free cash position before April this year, when the lower threshold kicks in.”  He added that savers who have already registered for ‘primary’ or ‘enhanced’ protection of their pension funds, under the so-called A-Day pension reforms of 2006, will not escape this cut if their tax-free cash position was not protected at the time.

Applications for fixed protection need to be received by HM Revenue & Customs before April 5th 2012 and can only be made by sending a completed AP33227 form by post.

John Lawson, head of pensions policy with Standard Life said, “Most high earners have nothing to lose and everything to gain from claiming fixed protection.  In some cases, it is even possible to stay in your company pension scheme and build up further 60ths to 80ths without losing fixed protection, as long as you keep pensionable pay increases to a minimum.”


  • Date posted:
    02/03/2012
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