20 May Be on the ball, or the taxman may take a big bite out of your pension pot! – May 2013
When people are relaxing over the weekend and winding down from a busy week the last thing on their mind is consideration of their pension planning, more likely to watch the football on the television. But beware, it’s not only famous footballers that can bear their teeth, the taxman could be sinking his teeth into your pension pot if you’re not careful.
The introduction of Automatic Enrolment and Workplace Pensions for all, promoted by the likes of Karen Brady of “The Apprentice” and Theo Paphitis, one of BBC’s ‘’Dragons’’ is bringing this important area into our own living rooms. For those with no or little pension provision this must be good, according to John Sterricks, Pensions Specialist at CDC Wealth Management.
Long term, contributions for all employees can only be a benefit. But for a growing minority, automatic enrolment could create a significant tax bill.
There are two, soon to be three, levels of “protection” that individuals can hold because of changes to pension limits introduced by past and present governments. This is due to the Pension Lifetime Allowance, the maximum amount allowed to be built up by individuals. The three levels of protection are Enhanced Protection (for funds built up before 6 April 2006), Fixed Protection, when the Lifetime Limit reduced from £1.8million to £1.5million (6 April 2012) and the aptly named Fixed Protection (2014) due to the recently announced further reduction to £1.25m effective from 6 April 2014.
John provides a cautionary message, “If you already have a protection certificate or have plans to apply for the new protection; the caveat is that no further payments from yourself or any other source can be paid into a UK Pension Scheme and therein lies the problem. One payment made, even in error such as through auto-enrolment, cannot simply be un-done and paid back. So for anyone with a Protection Certificate, at their first auto-enrolment date and every three years thereafter, they must positively confirm they are opting out of the scheme”.
So who should consider getting advice?
John suggests the watchword here is to get quality advice. He says “anyone with a Protection Certificate already in place needs to be careful. But also a significant minority should have a real conversation around locking in to the higher lifetime limit of £1.5m.”
He continues “Its people’s investment timeframes and potential returns that represent the biggest threat to creating an avoidable tax bill. It’s not just those who are close to this limit that need advice. Younger people can have an investment timeframe for pensions of anything from 10 to 35 years. A fund with a 7% annual return would approximately double every 10 years. Work it back. A 10 year timeframe is £750,000, 20 years its £375,000, for 30 years £188,000. Seeking the right advice now could save you an unnecessary tax bill of up to £62,500. A tax bill even a Premiership Footballer would bodyswerve.”
John Sterricks is Pensions Specialist at CDC Wealth Management and Chartered Financial Planner