If you think that you are going to have a large pension at retirement or if you are building up a large pension fund, we would like to remind you that you can protect your pension against some tax charges by registering with HM Revenue & Customs for either “primary” or “enhanced protection” (or both) by 5 April 2009.
It is not clear cut who could benefit from such action. However, if your pension fund is likely to be £1m or more or if you are going to receive a pension of £50,000 a year, you may like to take some immediate action to protect your pension.
To enable you to apply for “primary protection” the value of your pension rights as at 5 April 2006 will need to be calculated by 5 April 2009, so it is important not to delay.
The need to protect your pension arises because the Finance Act 2004 introduced the concept of the Standard Lifetime Allowance (SLA). This is a threshold up to which the value of any benefits (from all of your pension arrangements) can be received without attracting a tax charge above the usual income tax on pensions in payment under PAYE.
If your benefits exceed the SLA at the point of retirement, tax is levied at 25% of the value of the excess taken as pension and at 55% of the value of the excess taken as lump sum.
The 24 November 2008 pre-budget report froze the SLA at £1.8m until April 2016.
The method of valuing pension benefits against the SLA is to multiply the annual pension by 20 and then to add the value of any lump sum. If you also
have a pension which was already in payment on 5 April 2006, 25 x that annual pension is added to the earlier calculation.
Registering for “primary protection” provides you with individual SLA based on how much your benefits at 5 April 2006 exceeded £1.5 million at that time. If your new revised personal SLA is exceeded then tax charges become payable on that new excess, in the same way as with any excess over the SLA (on a smaller excess amount).
By registering for “enhanced protection” you will not pay tax on pension benefits in excess of the SLA provided that your benefits at 5 April 2006 do not increase beyond certain limits. If the limit is exceeded, you will pay tax on the excess in the same way as with any excess over the SLA (on a smaller excess amount).
In summary, we recommend high earners consider taking urgent action to establish whether they may benefit from protecting their pension.
For further information or to register for protection go to:
http://www.hmrc.gov.uk/pensionschemes/life-allow-pn.htm