Executive pensions face new tax hit
HIGHER earners and business owners who have accumulated big pension funds could be hit by a change in the tax rules from this April, writes Nick Beal, director of David Williams IFA.
The Government is reducing the lifetime cap on the maximum value of a pension fund from £1.5 million to £1.25 million. Those whose funds grow above the limit face a 55% tax on the excess at retirement. In the worst case, this reduction in allowance could trigger an extra tax bill of £137,500.
The reduced limit is a signal for higher earners, business owners and those with long service in a final salary pension scheme to review their savings. David Williams IFA, Northampton’s leading firm of Chartered Financial Planners, has been working with clients over the past few months to prepare for the rule change.
Fortunately, those whose accumulated pensions are already above the new £1.25 million threshold can choose to protect their funds. By registering with HMRC you are able to retain the existing £1.5 million limit, in return for accepting some restrictions on what you do with the pension.
Protecting the fund now will also help if the lifetime limit is cut further in future. Some politicians have called for a reduction to £1 million.
It is not only those whose pensions are already worth £1.25 million or above who need to consider protection. Younger executives or business owners with smaller funds could find that ten or 15 years of good investment growth puts them above the limit.
Take the example of a successful investor aged 45 who has used their pension to buy two commercial properties, each worth £400,000. Although worth £800,000 today, if these properties grow in value at 2% a year and each produces rent of £25,000 a year, the fund will be worth more than £1.475 million by the age of 55 – the earliest date they can start drawing an income.
This is an area where experienced and skilled financial advice is essential. An independent adviser can help in valuing existing funds and any accumulated final salary pensions. And an adviser will also be able to help you choose the best form of protection.
In some cases, once funds are protected it is not possible for any further money to be paid into a pension, either by the saver or their employer. Higher earners may need to negotiate with employers to replace pension contributions with extra pay or other benefits.
For more information, or to arrange an appointment to review your pensions, contact Nick Beal on 01604 621302.