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Saving for retirement is something that most of us put off as long as we can. But the reality is that the sooner you start paying into a pension the higher your income in retirement is likely to be. If you are working you are usually building up the right to a basic state pension - and possibly an additional State pension - but these are unlikely to be enough to give you the standard of living you want.
Pensions represent a highly tax advantaged means of saving for retirement. Any contributions you pay qualify for income tax relief at your highest marginal rate. If you are a higher rate taxpayer, for every £1 invested costs you just 60p. Individuals paying the 50% income tax rate are able to claim at the highest rate. Contributions grow in a tax advantaged fund.
If you are employed and your employer offers access to a pension scheme, it would almost certainly pay to join, as your employer will be contributing to the plan - often at substantial levels.
Since April 2006, the rules governing pension contributions have been relaxed. It is now possible to make personal contributions and receive tax relief up to the level of your earnings (subject to an annual cap currently £50,000.) There is an overall cap on the fund you may accrue (this is called the 'Lifetime Allowance') and this currently stands at £1,800,000, though this will fall to £1.5m in April 2012.
Individuals are now able to offset unused parts of the annual allowance over a three year period to allow for one-off spikes in contributions over the £50,000 limit.
There are opportunities for many in these changes and if you want to know more about your options please contact us
What is fixed protection?
The lifetime allowance is the capital value of an individual’s pension rights (including final salary schemes, money purchase arrangements and personal pensions) which can be accumulated without incurring a tax charge. On 6 April 2012 the lifetime allowance will reduce to £1.5 million from the current level of £1.8 million. Fixed protection allows individuals to maintain a lifetime allowance of £1.8 million until such time as the standard lifetime allowance (SLA) increases beyond this level. This means that if the SLA rises to more than £1.8 million, fixed protection will cease and the individual will be subject to the SLA in force at the time they take their benefits.
Individuals with pension funds at, or close to, £1.5 million, may wish to consider whether they should apply for fixed protection before 6 April 2012 so that they maintain a lifetime allowance of £1.8 million. If fixed protection is put in place before 6 April 2012, this will either fully protect or provide some protection against the lifetime allowance charge.
If no action is taken, and an individuals whose pension fund is more than £1.5 million takes benefits after 6 April 2012, and they do not already have enhanced or primary protection, there will be a lifetime allowance charge on the excess fund over £1.5 million. The charge will be 55% if taken as a lump sum or 25% if the excess fund is taken as pension income.
Why apply for fixed protection?
If an individual expects their pension savings might be valued at more than £1.5 million (including any benefits that have already crystallised) when they come to take benefits on or after 6 April 2012, they can use fixed protection to help negate or reduce any lifetime allowance charge. Fixed protection allows individuals to crystallise benefits worth up to £1.8 million without paying the lifetime allowance charge.
Who can apply for fixed protection?
Anyone who has pension savings in a registered pension scheme. They do not need to have already built up pension savings of more than £1.5 million to apply. But an individual is only likely to need fixed protection if they think that their total benefits from all registered pension schemes will be more than £1.5 million when they come to take benefits after 5 April 2012.
What are the conditions for fixed protection?
Once an individual has fixed protection there are restrictions on what they will be able to do with their benefits. For example, they will normally need to stop building up benefits under every registered pension scheme that they belong to by 5 April 2012. So, all contributions will have to stop. To keep fixed protection a member:
- cannot start a new arrangement under a registered pension scheme other than to accept a
transfer of existing pension rights,
- cannot pay any contributions to a pension arrangement,
- cannot build up any further pension benefits.
If the member breaks any of these conditions then they will lose their fixed protection. A member must tell HMRC if they lose fixed protection as there are penalties for not doing so.
How and when to apply for fixed protection?
Someone wanting to apply for fixed protection must complete form APSS227. This form is available from the HMRC website at: www.hmrc.gov.uk/pensionschemes/apss227.pdf
An individual can only apply for fixed protection until 5 April 2012. After that date no further applications can be accepted. So individuals will need to make sure that HMRC receives their fully completed form by 5 April 2012.
What happens when someone with fixed protection takes their benefits?
When an individual with fixed protection wishes to take their benefits, they must tell their scheme administrator that they have fixed protection. The legal minimum is that the member must give the scheme administrator the fixed protection certificate reference number. When a scheme administrator is given details of a member’s fixed protection they proceed on the basis that the member has a standard lifetime allowance of £1.8 million.
What needs to be done between now and 5 April 2012?
There is only a small window in which individuals can apply for fixed protection, and make contributions if they wish to do so. For example, if an individual has pension savings which are approaching £1.5 million, and thinks they may want to apply for fixed protection, they may wish to maximize any pension contributions now. Fixed protection should then be applied for so that the completed application reaches HMRC no later than 5th April 2012, and all pension savings must cease from that date.
Types of Pension
There are different types of pension schemes to which you can contribute (in addition to your employer's scheme).
Stakeholder PensionsFeature low minimum contributions and a cap on charges. Represent good value and a good home for those starting to save for retirement.
Personal PensionsLikely to offer a greater range of investment choices and funds than a stakeholder pension, but often carry higher charges and care is required when choosing a provider.
Self Invested Personal Pensions (SIPP)SIPPs are designed for people who want to manage their own fund by dealing with, and switching, their investments when they choose. They may have higher fixed charges than other personal pensions or stakeholder pensions. For these reasons, they are more suitable for large funds and for people who are experienced with investing.
With standard personal pension schemes, your investments are managed for you within the pooled fund you have chosen. SIPPs are a form of personal pension scheme that give you the freedom to choose and manage your own investments, or you can employ and pay for an authorised investment manager to make the decisions for you.
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