A Day changes to pensions

Milarky

Got a very useful summary from Halifax today which highlights the main changes from 6th April 2006:

What caught my eye was the explanation of how large pension funds can claim 'protection' against the tax charge.

The 'lifetime allowance' will be £1.5m in 2006/07, £1.6m in 2007/08, £1.65m in 2008/09, £1.75m in 2009/10 and £1.8m in 2010/11

You can claim 'primary protection' or 'enhanced protection'

'Primary protection' means that if your fund is valued at (say) £1.8m on 'A Day' (that is 120% of the 'lifetime allowance') it is registered with that level rather than the £1.5m level and retains protection from the tax charge in proportion as the lifetime allowance goes up. By 2010/11 therefore such a fund would pay no tax charge upto 120% of £1.8m or £2.16m (get it?)

No wonder, therefore, that anyone who had £1.5 million+ when the concept of the lifetime allowance was put forward would have been adviced to maximize contributions into their pension thereafter - since anything they put in before A Day was effectively exempted from the provisions of the cap. (The same would apply for funds which might be below the lifetime allowance but could be topped up to that level before 2006)

There is also another form of 'protection' known as 'enhanced protection'. What this does is ignore any 'actual' fund growth subsequent to 'A Day' that exceeds the fixed factors allowed (the '£1.5m' to '£1.6m' changes etc) already provided that no more personal contributions are added after that date (although contracted out payments by the government are ignored). Thus if 'enhnaced protection' was applied to a fund of £1.8m on 'A' day, and all contributions stopped, and it grew by 10% a year (for 4 years) until 2010/11 the level of protection would be the value of the fund at that time, namely £2.635m

You have three years from A Day to elect for one form of protection or the other. (Hmm nice work if you can get it!)

(information available from here: http://www.a-dayadvice.co.uk/glossary.html )