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Savers urged to act now as pension tax changes approach

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Time is running out for savers who have amassed large pension pots to protect themselves from punitive tax charges.

From 6 April, the amount you can save in a pension tax-free – your lifetime allowance (LTA) – will drop to £1.25m from £1.5m.

Although, the £1.25m limit may sound a lot, Ian McNally, director at wealth management firm Saunderson House, says savers should still consider taking action.

He said: “To give an example, a 45 year old investor with money purchase pension rights currently totalling £700,000 will exceed the reduced limit at age 55 (the earliest opportunity at which benefits can be taken) if his or her fund value increases by 6% per annum net of charges.”

Individuals who wish to retain a LTA of £1.5m can apply for Fixed Protection 2014 (FP14) from HMRC before 6 April 2014.

If the application is accepted, FP14 will fix your lifetime allowance at £1.5m. This means you can have up to £1.5m of pension savings without paying the new lifetime allowance charge coming in on 6 April.

Savers will however lose fixed protection 2014 if they make any further pension contributions or accrue pension benefits after 5 April 2014.

FP14 can be revoked, giving savers the option to make further pension contributions in future years.

If you’re unsure of the value of your pension savings and don’t know whether you need fixed protection 2014 contact your pension scheme administrator or financial adviser.

Another option for savers with pension pots between £1.25m and £1.5m on 5 April 2014 is to apply for Individual Protection 2014 (IP14).

IP14 offers a protected lifetime allowance equal to the value of your pension on 5 April 2014 – up to an overall maximum of £1.5m.

Unlike FP14 there are no restrictions on future pension savings, although if you exceed your protected lifetime allowance the excess will be subject to the lifetime allowance charge of 55%.

Although IP14 will operate from 6 April 2014, savers will not be able to apply for the form until mid-August.

You can use the HMRC lifetime allowance checking tool to help you decide whether to apply for fixed protection 2014 and individual protection 2014.

Savers can apply for Fixed Protection 2014 – here. This must be done by 5 April 2014.

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