Lifetime Allowance and Fixed Protection

Captain1

I will be 55 in July 2012. I'm in a capped final salary scheme. My pensionable pay is £100k and I pay AVCs of ~17% of my salary. My employer contributes ~29% of my pensionable pay too.

The pension built up to date is £70k. If I carry on working to age 60 and continue with my AVCs, the pension will be £95k (assuming pensionable salary increases of 2% pa) or a tax-free lump sum of 25% of the value of the benefits and a reduced pension of ~£65k.

My wife has her own pension arrangements and the kids are entering University. We would like to retire when I reach 57.

Should I opt before 5th April for fixed protection to benefit from a lifetime allowance of £1.8m?

Either with or without the fixed protection, should I cancel further AVCs, take the taxed income instead and invest it or does the pension scheme continue to be the best investment even if I exceed the Lifetime Allowance?

I'd be grateful for any advice.

Frogfish

If you opt for Fixed Protection you won't be able to make further contributions. For final salary schemes it is different but have a look at the rules around benefit accrual.

Neverland

I have a SIPP not a DB scheme but I can tell you need to get some proper advice ASAP

The rules around DB schemes are very complex but it looks likely to me that you have benefits close to the new lifetime limit of £1.5m already

The process for getting fixed protection is very manual and slow - I know because it took two months for me to get it when it first came out

You have to send a form off the website to the Inland Revenue before the end of the tax year and they send you a document you have to keep saying you have fixed your lifetime allowance at £1.8m

You now have less than one month to write to them...

dunstonh

The process for getting fixed protection is very manual and slow - I know because it took two months for me to get it when it first came out

It must have improved as I did one and the notification took a couple of weeks to arrive. However, it is cutting it fine now so action is needed.

jamesd

Are you planning to take the capped final salary pension when you are 57, thereby preventing it from reaching £95k? If you are, then it doesn't look as though you will need to use fixed protection. Fixed protection has the disadvantage of banning you from getting any future pension contributions, get so much as a Pound from your employer and the protection vanishes. Which means that if you took it now you'd lose two years of additional pension accruals until you reach 57.

The lifetime allowance percentage used is calculated on the day you first take benefits from a pension. So if you take them at 57 that stops the clock and this pension would never again be checked against the lifetime allowance. And there doesn't seem to be much chance of exceeding £1.5 million by the time you're 55, using 20 times the annual income as the valuation for lifetime allowance purposes. At the moment on the £70k built up to date the value seems to be £1.4 million with still 100k (5k of pension increase) of margin to go before you go over the 1.5 million new limit.

So sticking to your 57 plan it looks to me that you're probably going to be better off not taking the protection but instead continuing to get the employer contributions for the next two years. And watching those carefully to be sure you don't go over £1.5 million near the end.

Since you are quite close to the £1.5 million in two years it doesn't seem like a good idea to use AVCs into a pension until you're closer to the retirement date and more sure that you won't go over the limit. You can always stick in AVCs or personal pension contributions near the end.

With a taxed income of £100k you might want to make small AVCs just to dodge the unpleasant tax stuff that starts at £100k, if budget changes bring you into those traps.

So assuming 57 my guess is taking free money from your employer into your pension and taxed non-pension money from your own pay should leave you best off with that 57 retirement target and a bit of safety margin still left.

Still best to get an IFA to give a paid professional opinion but I think it's just about clear that no protection is best with your plans.

Captain1

You've confirmed my understanding of this so thank you indeed - I'll continue my AVCs and employer contributions to Jan 2014 - a little younger than 57 as it turns out - at which point I reach exactly £1.5m, after which there is no point in continuing with any further AVCs.

I could slow down my AVCs now and keep working a little longer - it becomes a lifestyle decision really - but let's see what the budget throws up!

jamesd

Unless this allows you to take all AVC money as cash or to get a lump sum without reducing pension income, AVCs wouldn't be optimal for this purpose unless you can take them independently of the main pension.

Better would be payments into a standalone personal pension, either normal or SIPP form. This way you could pay the money in and soon after that take a lump sum from it, thereby getting the percentage of the lifetime allowance used calculated before there has been any investment growth. So you could say pay in £20k of salary worth today (12k) and take the lump sum out in six weeks, after HMRC has paid in the part of the tax relief that goes into the pension. Technically this is entering income drawdown and not taking any income. Hargreaves Lansdown has fairly modest charges for this sort of thing.

If you happen to have the cash available and unused parts of the 50k allowance from the last three years you could even pay in all that you plan to now and maybe just about have time to get into drawdown before 5 April and get the percentage calculated as a percentage of 1.8 million instead of 1.5. Phone the provider to discus this if it interests you - HL can probably get it done in time, some might not.

If you have the allowance and interest but not the cash, use of an overdraft until you get the 25% lump sum and HMRC refund, or a short term personal loan, would make sense as well.

A little careful trickery that will help to keep you below the limit.

Captain1

I think the problem with this is that I have already used practically all of my annual allowance £50k for 2011/12 as between me and my employer we are contributing 46% of my pensionable pay of £100k. Looked at the other way, 16x the pension accrued in the last tax year 2010/11 (which coincides with the pension input period) adjusted for inflation came to over £48k and it's unlikely to be less in 2011/12. So I don't think I have any capacity for more tax-free pension contributions but I'm happy to be told otherwise!

jamesd

You have the same 50k allowance for 2009/10 and 2010/11 so if those aren't fully used there may be some potential there. Here's the HMRC description of the carry-forward rule.

Pension input periods can be changed but I expect that won't help here because you'll be needing to use most of next year's limit anyway for the employer contributions.