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Thousands protect their pension pot from lifetime limit cut

Written by: Paloma Kubiak
More than 17,000 applications have been made by savers since July to protect their pension pots against the fall in the Lifetime Allowance, official statistics reveal.

The Lifetime Allowance (LTA) is the maximum amount of pension savings you can build up without a tax charge and this figure dropped from £1.25m to £1m on 6 April this year.

Anyone who exceeds this limit is hit with a 25% tax bill on the excess if the money is withdrawn as income, or a 55% bill if the money’s taken as a cash lump sum.

Earlier this month, it was revealed that £126m was paid out in tax by pension savers for breaching the £1.25m allowance in 2015/16.

However, there are special rules in place to help investors protect their money, depending on the amount and the date at which the sum was accrued.

HM Revenue & Customs (HMRC) has today published details on the uptake of the protections against the fall in the LTA.

In total, it received 17,453 online applications between 28 July and 18 September 2016, made up of the following:

  • 617 Individual Protection 2014 (IP2014) applications (when the LTA was cut from £1.5m to £1.25m)
  • 4,867 Individual Protection 2016 (IP2016) applications (protects the amount saved as at 5 April 2016, anywhere between £1m and £1.25m)
  • 11,969 Fixed Protection 2016 (FP2016) applications (gives you a £1.25m LTA, though you must have stopped contributions on or before 5 April 2016).

‘No longer just a problem for the highest earners’

Nathan Long, senior pension analyst at Hargreaves Lansdown, said:Pension investors have flocked to register for the latest round of protections as the drop in the LTA begins to bite. A £1m lifetime limit is no longer a problem just for the highest earners and could impact those who have invested their pension wisely. It can be a real dilemma to understand if you may be impacted as the rules are complex, however all is not lost for those who think they may bump up against the limit.

“Providing no further contributions have been made since 5 April this year they can still apply for protection against the latest drop with some even able to claim alternative protection while continuing to make contributions.”

See’s How to protect your pension pot from tax for more information on the protections available to you.

What should pension investors do?

Below are five steps from Hargreaves Lansdown for people with large pension pots:

1) Get valuations for all of your pensions, this includes defined benefit pensions. You need to know where you stand as all of your pensions should count, so uncovering any old pension schemes from previous employers is a must.

2) Work out when you will retire and project forward your pensions – you can do this using an online pension calculator. This should help you understand if there may be an issue.

3) Those who have not paid in to their pension since 5 April can apply to keep a LTA of £1.25m. If you have made further pension contributions since 5 April this year all may not be lost providing your pension was already more than £1m. You can still apply to have individual protection against the drop in allowance which allows you to shelter more than the new lower limit. What’s more, if your pension was more than £1.25m on 5 April 2014, an even higher protection may be available.

4) Don’t forget employer contributions. You may be odds on to breach the allowance if you continue paying into your company pension, but depending upon the generosity of the contributions it could still be worth staying in even if you are taxed heavily when the money is withdrawn. Speak to your employer, they may offer you extra salary in exchange for forgoing future pension contributions.

5) If you are unsure, seek financial advice. This is a very complex element of financial planning and one of the times when paying for professional advice could be beneficial.

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