“My – what a big pension you have!” Cue Sid James with his gravelly chuckle. I could probably ‘carry on’ with the innuendo throughout my blog but it could land me in hot water. The limits of acceptable workplace humour have shifted a great deal since the 1960’s.
Pension funding limits are shifting too. Those with a pension fund big enough to raise a Kenneth Williams “ooh matron” will need advice on whether they expect to breach the reduced £1.25M LTA and if they will need to apply for protection.
Broadly, the fundamentals of the two new forms of protection are:
- Fixed protection 2014. Keep the existing £1.5M LTA but stop funding.
- Individual Protection. Only available if funds are already greater than £1.25M. The LTA will equal the fund value at 5 April 2014 (subject to a cap of £1.5M) but fund can continue.
So is it ok to carry on funding knowing that you may breach the limit and face a potential 55% tax charge on the excess?
For some it will be. But they may need reassuring that doing nothing is the right option for them. No protection might mean paying more tax. But it could still give the best result – particularly if it means continuing to build-up additional years of final salary benefits or losing out on employer contributions.
Applying for Fixed Protection is the biggest, strictly time-bound decision. Pension contributions will probably need to stop after 6 April to secure the £1.5M allowance.
This raises the thorny question of potentially opting-out of final salary pension schemes to protect the higher allowance. (I sense an angry mob of compliance managers armed with flaming torches and pitchforks!)
In most cases, staying in a DB scheme after April will blow fixed protection. Probably only those with long service, 38 years plus, and on a pay freeze will be able to stay in, for now.
For many it will probably be better to just to keep accruing benefits – even if this means paying a bit more LTA tax. The amount of benefit accrued each year can be extremely valuable, and the employer will pick up the lion’s share of the cost. And in the private sector, once you leave, you’re unlikely to get back in.
It’s only those close to retirement who might want to consider opting-out. Leaving the scheme early will see benefits increased each year in line with inflation. This could give a better result than staying in and taking the tax charge.
Applying for fixed protection can be tough decision to take, especially if there is still some way to go before retirement. It means giving up on future pension saving. It also can mean giving up on ‘free money’ in the form of employer pension funding.
Some private sector employers may offer alternative remuneration in place of the pension contribution for their key employees. But will this be enough to outweigh the potential pension benefit given up after a LTA tax charge? And remember, most employer payments to a pension within the annual allowance will not be taxable, whereas alternatives will likely be taxed as additional pay.
Individual Protection on the other hand is a no brainer – where it’s available. The allowance will be fixed at the value of the funds on 5 April and crucially funding can continue. So it’s a win –win situation, especially as it means not missing out on employer contributions to get a higher allowance.
It is possible to apply for both individual protection and fixed protection. This would offer a £1.5m LTA (fixed protection) but with a safety net, that if contributions are restarted the limit only falls back as far as the individual protection allowance rather all the way down to £1.25m.
The clock is ticking for making the decision on whether to apply for protection. Fixed protection applications need to be in before 6 April 2014. And it’s advice you could long be remembered for “Infamy! Infamy! – my adviser’s got it in for me!”