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A Pension Rethink May Be Needed – Rapidly!
The Chancellor's Pre-Budget Report contained two unexpected announcements about the taxation of pensions.
For five years from 2011/12 the Chancellor plans to freeze:
• The lifetime allowance , which effectively sets the normal tax-efficient maximum value of pension plan benefits; and
• The annual allowance , which usually sets the maximum tax-efficient contribution (or increase in the value of pension benefits) in a single tax year.
The lifetime allowance started at £1.5m in April 2006 and will reach its freezing point of £1.8m in April 2010. Similarly the annual allowance began at £215,000 and will plateau at £255,000. It had generally been thought that the lifetime allowance would rise each year for the five years after 2010/11, at least to reflect inflation. The annual allowance has been increasing at £10,000 a year and there had been no indications that the pattern would not continue.
The Chancellor's move sits alongside future income tax and NIC increases for high earners. The freeze was probably at least partly prompted by a desire to limit the scope for pension contributions with 45% income tax relief from 2011/12. However, its impact is much wider, as the example below shows.FROZEN OUT? On 5 April 2006, Helen had a self invested personal pension (SIPP) with a value of £1m, which was invested in a variety of equity and property funds. Just over a year later, when talk about the credit crunch started to grab the headlines, Helen switched all her SIPP into cash funds, where it has remained since. The SIPP is now worth £1.3m. In May 2006, Helen had discussed with her adviser whether she should elect for ‘transitional protection' to protect her SIPP from a tax charge if its value grew to above the level of the lifetime allowance. Both agreed that there was very little likelihood of needing such protection because: • Helen was not going to make further contributions; • Her fund would have to grow by 50% to match the then lifetime allowance of £1.5m; and • The lifetime allowance would be £1.8m by 2010 and was expected to grow each year thereafter. Helen and her adviser are now having a rapid rethink. Helen's planed retirement date is December 2015, when the (frozen) lifetime allowance will be £1.8m. If the value of Helen's SIPP grows by more than about 4.8% a year, she will be facing a lifetime allowance charge of up to 55% on part of her funds. |
ACTION
The freezing of the lifetime and annual allowances means that your retirement planning should be reviewed. You may need to elect for transitional protection – a complex process – before the 5 April 2009 deadline. Alternatively it might be wise to alter the timing of contributions or even when you start to draw benefits.
Call us today for a Pre-Budget Report reassessment of your retirement planning.