Pensions are rarely out of the headlines these days, but how much attention do you pay to yours? As a dentist, you could be one of the many pension savers potentially facing a hefty tax bill at retirement when the pension lifetime allowance (LTA) drops from £1.5m to £1.25m from 6 April.
The LTA is the amount that can be built up across all of your pension funds before incurring a 55% tax charge.
Who’s likely to be affected?
HM Revenue & Customs (HMRC) has indicated that 30,000 people will be affected immediately by reducing LTA, and that over the longer term, up to 360,000 people will break this new limit. Potential investment growth or long service in a defined benefit scheme will mean some people risk exceeding the LTA without necessarily realising it.
Should I be concerned?
A £1.25m limit may not set alarm bells ringing. But it’s easy to underestimate how valuable a defined benefit pension is – or realise how it’s tested against the LTA.
If you’ve already accrued an NHS pension of £25,000 a year, this already uses £500,000 of your allowance.
Even leaving the scheme early sees benefits revalued up to retirement. Allowing for inflation at 3.3% over 10 years, this takes the pension up to £34,590pa – using up £692,000 LTA.
This is because the NHS pension is valued at 20 times the annual pension when testing against the LTA. From April, the maximum defined pension that can be built up without suffering the tax charge is £62,500.
And if you have other pension savings outside the NHS they will need to be factored in to include any potential growth in your pension fund between now and when you retire.
Protecting your benefits
The government has tried to soften the blow for those caught by the cut by providing protection for pension benefits. Fixed protection fixes the LTA at £1.5m beyond 2014. But there’s a trade-off: pension contributions must stop after 5 April 2014. However, continuing to receive employer contributions and taking the tax hit could still be the best outcome.
Individual protection is only available if pension savings exceed £1.25m on 5 April 2014. This will give a personal LTA equal to the value of your pension fund on 5 April 2014 (up to a maximum of £1.5m). And you can still continue to pay into your pension and continue to receive valuable employer contributions.
If you think your pension funds are likely to breach the new £1.25m LTA you face some important decisions, as it could lead to a tax bill of up to £137,500.
If you think you might be affected by the reducing LTA, speak to your financial adviser. If you don’t already have one, our online ‘find an adviser’ tool will help find one near you. If you’re unsure about whether or not it will impact you, visit www.standardlife.co.uk/ticktock and take our simple online test.
*Tax rules and legislation can change and information is based on Standard Life’s understanding of the law and current HM Revenue and Customs practise.
*The value of investments can go up or down and may be worth less than was paid in. The value of your pension at retirement depends on investment performance and is therefore not guaranteed.