Know your limits. Are you in excess of the lifetime allowance on your pension?

We have seen the cap on pensions savings decrease year after year. The cap in the 2011/12 tax year was £1.8m, falling to £1.5m for the tax year beginning April 2012. And from April 2014 the Lifetime Allowance changed once again. Now the maximum pensions saving that anyone is allowed to build, before it becomes subject to taxation will be 1.25 million. This cut off applies to an individual’s entire pension savings, even if spread across various schemes.

Yes 1.25 million does seem rather a high number, but the continuous reduction in the limit means now that thousands of people will fall into the net. According to HM Revenue & Customs the 2014 reduction to £1.25m will mean 360,000 pension savers are impacted.

To put this into perspective: At current annuity rates a healthy person aged 60, wanting an index-linked annuity for life and taking no lump sump, would receive a starting pension of £42,000 if he had a pot of £1.25m.

So what does this mean?

Well, savers will pay tax on any excess savings above the Lifetime Allowance Limit (LTA). The rate of tax depends on how savers receive the excess. If it is in the form of a lump sum, then the rate of tax is an eye-watering 55 percent. If it is in the form of a regular pension, the excess is taxed at 25 percent.

So what effect could the taxation have? An individual with a pension pot of £1.5m could face a charge of up to £137,500 if they do not protect themselves from the most recent cut to the lifetime allowance.

There have been various schemes introduced by HMRC enabling individuals to apply for protection over and above the lifetime allowance limit. These included: Enhanced Protection, Primary Protection, Fixed Protection and the most recent until now, Fixed Protection 2014:

Fixed Protection 2014, allowed savers with pensions likely to breach the £1.25m cap to apply for protection but  this has also been and gone as the deadline was April 6, 2014

All is not lost however: If your total pension savings exceed the new lower limit that applied from 2014-15 you may still be able to apply for protection. This is now known as Individual Protection 2014.

Individual Protection 2014 (IP2014) is available if the value of your pension savings on 5 April 2014 was over the new limit of £1.25 million. Individual protection 2014 has been available since August 2014. Your application must be received by HMRC no later than 5 April 2017.

You will not lose individual protection 2014 by making further savings into your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.

The protection will benefit those wanting to maximize the value of their pot. If you’ve worked hard all your life and saved up a comfortable nest egg a potential 55% LTA tax could be devastating.