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Preston-based financial services group, Taylor Patterson, is reminding high earners of changes in pension legislation which could have a major effect on their income.
There are now just three months to go until the second tranche of the Government’s new pension legislation comes into force from April 2012, which is why those with significant pension funds are being urged to prepare now to protect themselves against unnecessary tax charges.
The changes mean that the Lifetime Allowance for pension funds and benefits will be reduced from £1.8m to £1.5m – the level at which it was originally introduced in 2006. The allowance is the maximum amount which can be drawn from a fund before tax penalties are imposed, which could be up to 55 per cent if the excess is taken as a lump sum.
A new type of protection, called fixed protection, has also been introduced to ‘soften the blow’, which allows those eligible to freeze the Lifetime Allowance at £1.8m, as long as certain future restrictions are complied with – the major constraint being that no future contributions can be made.
“In regard to these changes we need to consider not only people who have not drawn benefits and feel they may want to protect a potential fund of £1.8 million to draw on, but also those who have drawn benefits after 2006,” business development manager for SIPP and SSAS at Taylor Patterson, Kerry Houghton, explained.
“Unlike the last occasion when protection issues arose, individuals who are in drawdown are not protected and, amongst other possible potential events, will have their funds tested against the lifetime allowance again when they are 75. They are allowed the difference in percentage terms between the old unused lifetime allowance and the new. Therefore applying for protection can help reduce tax charges on any growth within the scheme.
“It is important for these individuals to seek professional advice, as the granting of fixed protection poses many unanswerable questions, making this a tough and complex decision in many cases. For some, the option of contributing this year perhaps using the carry-forward of unused allowance and then applying for protection could be attractive.”
An individual can only apply for fixed protection if they do not already have primary or enhanced protection. The protection for these individuals continues. Applications for fixed protection must be received by HMRC by 5th April 2012.
For further information regarding fixed protection, contact Kerry Houghton on 01772 555073.