Prepare yourself to protect your pension

Right. Prepare yourself. This is about pensions and it is complicated. From 6 April next year, the Lifetime Allowance (LTA) for British pensions will fall from £1.5m to £1.25m: any amount you save in your pension beyond £1.25m will be subject to an LTA tax of 55% on your retirement. So if you retire with £1.5m in a defined-contribution pension*, for example, you will pay an immediate tax of £137,500 (55% of £250,000).

All is not lost, in that if you think this will affect you, you can apply for something called Fixed Protection 2104 (FP14 to your accountant) between August this year and April next year. This allows you to keep the current LTA of £1.5m as long as you don't put any new money into any pensions. If your investment returns take you over £1.5m you will still be charged on that excess, but at least you get to keep the LTA you have been working with.

The key to success here is to ensure you opt out of all other possibilities (you don't want to find you have lost your LTA as a result of a new employer opting you into his Nest pension scheme), and to have a go at your employer to see if he can come up with a benefit to replace the pension contributions he might have been making on your behalf.

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However, all this will, I think, raise a question for younger people. It clearly makes sense if you are knocking against the limit at age 53 and want to retire at 60 to set your £1.5m LTA in stone. But what if you are younger?

I asked an accountant this week how he would advise a lucky person aged 30 with £800,000 in a pension. Over 25 years, £800,000 would easily grow to £1.25m in both real (adjusted for inflation) and nominal (not adjusted) terms. So should you take pre-emptive action and protect yourself up to £1.25m now? (In other words, should you apply for protection and stop contributing to your pension now, in exchange for the certainty of knowing that £1.25m is protected from the LTA tax?)

That is apparently a "difficult question". Some people don't want to bother with the protection on the basis that the 45% tax relief on contributions and their (I think inflated) ideas about potential investment returns make the 55% tax well worth paying anyway. Some figure that it isn't worth doing because the LTA is bound to rise at some point, making the protection a handicap rather than a benefit.

I have my doubts the trend is to cut pensional lowances of every kind, not to raise them, so I figure you should lock in what you can get when you can. Either way, it is clear that anyone with a reasonable amount of money in a pension needs to think about FP14. This one's worth calling your accountant about.

* Things are, inevitably, different and much, much better for defined-benefit pensions (the ones based on your salary, rather than your investments). You can read about this on the blog.