New individual protection rules introduced
New rules announced by HM Revenue & Customs provide people with large pension savings the flexibility to continue to receive valuable employer contributions to their pension.
Higher- and additional-rate tax payers in particular may be better off receiving these pension contributions rather than receiving the benefit as additional salary, even though the future value of the additional pension contributions may exceed the Lifetime Allowance (and be subject to a 55 per cent tax charge if taken as a lump sum in retirement).
Not being able to make money purchase pension contributions under fixed protection means there could be serious consequences in applying this form of protection. For some, ceasing to contribute to a pension scheme may mean they lose any lump sum death benefit, as well as any future employer contributions.
Even if the employer agrees to pay the pension contribution to the employee as part of their salary instead, the tax and NI the employee will pay on the extra salary will leave them with significantly less to be able to personally invest outside of pension savings. This could mean they end up in a worse position than if they had continued active membership of their pension scheme and suffered the 55 per cent tax on the Lifetime Allowance (LTA) excess.
This shows the employee could end up with 55.8 per cent more as an initial investment through using their pension fund compared to receiving the equivalent net payment as salary. Take into account other factors such as:
savings within a pension fund benefits from gross roll-up
gains within a pension are not liable to capital gains tax
It is clear to see that there are benefits to continuing to make pension contributions regardless of the tax charge that may apply to the eventual value of those savings.ν
From 6 April 2014 the Lifetime Allowance (LTA) on pension savings will reduce from £1.5m to £1.25m. Pension savings over the LTA will be subject to a tax charge of 55 per cent if taken as a lump sum. People have up until 6 April 2014 to apply for fixed protection on their pension savings up to the value of £1.5m. This will protect the growth of existing savings from the LTA tax charge of 55 per cent up to the level of £1.5 million. People can also apply for personal protection, which will protect the current level of savings of between £1.25m and £1.5m, but will not protect against the future growth of those savings. Unlike fixed protection, with personal protection people are able to continue to make further pension contributions on which they can benefit from immediate tax relief at their highest rate(s) – these future contributions are likely to provide benefits that exceed the LTA which will suffer a 55 per cent tax charge when that excess value is taken as a lump sum.