Pensions update


Filed Under: Private Client

Written by: Martin Reynard

Taxpayers making larger pension contributions may have extra tax to pay for 2011/12 and/or 2012/13.

You should check your position now and act immediately, especially if the Statement relates to 2011/12 – any tax owed is now overdue. If you owe more than £2,000 and want your pension scheme to pay the tax charge for you (albeit by reduction in your pension benefits) you must notify your pension provider by 31 December 2013. Otherwise your pension provider can decline to pay the tax and you will have to pay it personally.

The Statements we have seen typically run to six pages and it is not immediately obvious to the lay person what they are about or that there may be a tax charge.

The so called Annual Allowance Tax Charge arises when total pension contributions paid by or on behalf of an individual exceed £50,000 gross in the tax year (£40,000 from 2014/15). For “final salary” pension schemes the increase in the value of the prospective retirement pension over the tax year is tested against the Allowance, not the employer and employee contributions as such.

Pension providers are obliged to issue a Pension Savings Statement should the Annual Allowance be exceeded. As the £50,000 limit was introduced quite quickly, pension providers were given until 6 October 2013 to issue Statements for 2011/12.

Just because you do not receive a Statement it does not mean you do not have tax to pay. A Provider will only issue a Statement where the Allowance is exceeded under its specific scheme or pension policy. Individuals may, of course, exceed the Allowance in aggregate over several pension arrangements while remaining under the limit for each separate one.

Members of overseas pension schemes be warned - you will not get a Statement at all but your, or your employer’s, contributions or benefits accruing may count towards the Allowance.

On the plus side, where contributions have been less than £50,000 in any of the previous three tax years, the unused Allowance can be carried forward to reduce the current year’s excess.

Limit on the total value of pension arrangements

The current Lifetime Allowance of £1.5m will reduce to £1.25m on 6 April 2014. Pension benefits in excess of the Lifetime Allowance are liable to tax of 55%. Individuals will be able to secure a Lifetime Allowance of more than £1.25m by registering with HMRC for:
  • Fixed Protection 2014 which provides a Lifetime Allowance of £1.5m, provided no further pension contributions are paid after 5 April 2014 (or final salary pension benefits are capped off at this date); applications for Fixed Protection 2014 can now be made and must be submitted by 5 April 2014.
  • Individual Protection 2014 which sets a personal Lifetime Allowance equal to the value of total pension benefits as 5 April 2014. It only applies to those with total pension benefits in excess of £1.25m on 5 April 2014 and is capped at £1.5m. Crucially, Individual Protection 2014 permits active membership of pension schemes to continue after 5 April 2014, allowing individuals to continue to benefit from employer contributions where no cash alternative is offered. The detail of Individual Protection 2014 has yet to be finalised and it remains possible, but unlikely, that it may not eventually be offered. Applications for Individual Protection 2014 can be made up until April 2017.