If you have a substantial pension pot and think you are likely to breach the new £1.5m lifetime pensions ceiling, act fast, says Simon Bonnett of Duncan Lawrie Private Bank. The Lifetime Allowance (LTA) is to be cut from £1.8m to £1.5m as of 6 April 2012 – unless you apply for protection.
You simply need to apply to HMRC for a new personalised LTA of £1.8m by 5 April. If you don’t, you could be “taxed at the rate of 62.5% on some of your pension pot”, warns Bonnett.
Say you have £100,000 excess over the LTA: if you took it as a lump sum, you’d be charged 55% (the LTA charge) and end up with a net lump sum of £45,000. If you took it as income, you would pay a 25% charge, then be taxed at the relevant tax rate on the remaining £75,000.
A 40% taxpayer would end up with £45,000 net income assuming the normal personal income tax allowance remains, while a 50% taxpayer would end up with £37,500, ie, an effective rate of 62.5%.
So protection is worth having, but remember: to keep it, you can’t “make any further contributions or build up benefits after 5 April 2012”.