Pension savers have been warned to check whether they will be hit by a major tax change after an expert said the changes will not only affect the mega-rich.
Angela South, managing director of Magna Wealth Management in Temple Grafton, Warwickshire, said that thousands of people were unaware of the impact of the new rules, from April 6, and did not realise that they might be affected.
The changes will see the amount that can be saved into a pension with tax relief over an entire lifetime cut from £1.8 million to £1.5 million.
“£1.8 million, or for that matter, £1.5 million, sounds like a fortune but many long term members of final salary schemes – such as senior teachers, doctors and other professionals – may be affected,” she said.
So too could company owners and directors planning their exit strategies for a well funded retirement.
And she pointed out that the reduction from £1.8 million to £1.5 million was a two edged sword.
“In the first place, not only does it limit by £300,000 the amount you can put into your pension, it also dramatically affects the amount of tax free cash you can take.
“You are currently allowed to take 25 per cent of your pension fund as a tax free lump sum when you choose to after the age of 55 – so the reduction in the allowance cuts the amount of tax free cash you can take by £75,000.
“Secondly, there could be an additional effective tax charge of 55 per cent on the surplus above £1.5 million,” she said.
“You can escape this tax by opting for fixed protection and this permits you to keep a lifetime allowance of £1.8 million – but you must stop paying into your pension fund at that point.”
The rules are complex and deciding on whether to go for fixed protection is not easy or straightforward.
“We need to consider when you want to retire, the alternative benefits your employer may offer, what future governments might do. In some cases, one option might be to take some of your pension now in order to be able to invest more after April 6.
“But every case is different, not only because of different pension products but also because one person’s retirement plans or options may be very different from another’s and we have to factor all the elements into the equation in order to lay out all of the options before our clients,” said Mrs South.
“There are other elements that need to be considered such as whether to opt for enhanced to fixed protection which, in a limited number of cases, will allow you to increase the amount of tax free cash available to you.
“Switching to fixed protection, however, would mean you lose the unlimited growth potential of your fund which will be taxed if it exceeds £1.8 million in retirement.”
Another suggestion is that those aged over 55 could benefit by moving £1.8 million into income drawdown before April 6, 2012.
Mrs South said: “This would provide you with a high tax free cash amount and allow you to continue with unlimited protection.
“But, and this is a big but, it means moving large sums into a situation that could attract a 55 per cent tax charge when you die.
“As you can see, three dimensional chess is relatively simple in comparison, and you need to take expert advice from an independent financial adviser who is experienced in all matters relating to pensions, benefits, inheritance tax and estate planning,” she stressed.
Magna Wealth Management is a trading name of Expat Pension Providers Ltd which was established to provide UK expats living overseas with the same quality of Financial Services Authority regulated advice that they would receive if they still lived in the UK.
The business was established by Angela South who has over 30 years experience on both the product and client side, having worked for companies such as Scottish Widows and Canada Life, before setting up her own independent financial advice service in 2008.
Magna Wealth Management now advises a wide range of UK-based clients in the business, professional and sporting world from its base in Temple Grafton, near Alcester, in Warwickshire.